Public sector balance sheets have changed dramatically in recent years and now give a comprehensive view of assets and liabilities. However, a few pieces of the jigsaw remain.
One of the more tricky questions is how they account for social benefits. Social benefits are a major area of expenditure – but there is no common standard in accounting for them.
The International Public Sector Accounting Standards Board (IPSASB) has therefore been working for some time on the recognition and measurement of social benefits to improve accountability, transparency and decision-making.
The proposed standard is intended to provide information to help assess: the nature of social benefits and schemes’ key features; and their effects on financial performance and position.
Feedback from early consultations suggests information provided on prospective future liabilities to pay benefits (assessed actuarially or otherwise) is of limited use unless equivalent information is provided on future inflows, such as taxation. In terms of prospective cashflows, IPSASB has developed Recommended practice guidance 1 on preparing financial reports that meet users’ needs for long-term fiscal information, including information about social benefit obligations they can expect to settle in the future.
After issuing its Conceptual framework for general purpose financial reporting by public sector entities, IPSASB has looked again at social benefits and published a consultation, Recognition and measurement of social benefits. This covers social assistance and social security but excludes employment-related social insurance, other transfers in kind and collective goods and services. Social assistance is the provision of benefits to all citizens; social insurance arises outside an employee-employer relationship. The exclusions include areas such as defence, health and education.
The point at which social benefits are recognised remains open to debate and the consultation suggests three options.
Obligating event approach
This considers the recognition point of social benefits in the same terms as a liability. There are five potential points, from the key participatory event (such as unemployment), through eligibility and claim events to the point at which a claim is enforceable.
Social contract approach
This acknowledges public sector obligations to pay benefits and individuals’ rights to receive them as commitments. Obligations are recognised when they become enforceable or claims are accepted.
Insurance approach
This considers some social benefits to be similar to an insurance contract. Obligations are recognised at the point coverage begins. This approach may only be suitable for contributory benefits.
The consultation considers these three approaches in detail and assesses them against the objectives of financial reporting and the Conceptual framework.
IPSASB has come to a preliminary view that a combination of option 1 (obligating event approach) and, for some or all contributory schemes, option 3 (insurance approach) may be required to reflect different circumstances. Its preliminary view is that option 2 (social contract approach) is unlikely to meet the objectives of financial reporting.
While more work needs to be done to produce a definitive standard, including in presentation and disclosure, the consultation represents a significant step in providing consistent financial reporting in this key area of public expenditure worldwide.
