Alan Bermingham, Policy Manager – Governments, CIPFA
In January 2019, the International Public Sector Accounting Standards Board (IPSASB) issued a new standard covering accounting for social benefits – IPSAS 42 Social Benefits. Social welfare is a key area of work for governments, who are generally responsible for delivering social benefits to citizens in need. These benefits also represent a large proportion of government expenditures (cash transfers) and can take the form of state pensions, unemployment benefits or other social and income support measures, all of which are within the scope of the new accounting standard.
So why is this standard necessary? IPSAS 42's origins stem from the need to provide transparency around the nature and financial effects of social benefit schemes, and to better understand how these schemes impact the government’s finances as a whole. As professional accountants, we all know that transparency with regard to both assets and liabilities of an entity is vital to making informed judgements about long-term financial sustainability. However, transparency is also crucial to understanding intergenerational (in)equity – the future financial burden that future generations will face from our policies today.
Current standards covering provisions, contingent assets and liabilities, such as IPSAS 19, specifically exclude accounting for social benefits. Therefore, any significant liabilities arising from these policies are not visible on government balance sheets. IPSAS 42 is designed to fill this gap in government financial reporting.
Now, some alarm bells might be ringing at this point. It's widely reported that the unfunded liability for state pension in the UK sits in the region of £4tn (ONS: Pensions in the national accounts, a fuller picture of the UK’s funded and unfunded pension obligations: 2010 to 2015; March 2018). To put this into context with the actual liabilities that are currently reported, the addition of unfunded state pension liabilities would nearly double the total liabilities on the national balance sheet (see figure 1).
Figure 1. Total Whole of Government Accounts liabilities (UK Government: Whole of Government Accounts 2016/17, June 2018)
|Public service pensions
|Other financial liabilities
|Trade and other payables
It’s therefore important to understand what the recognition and measurement points are under the new IPSAS 42 standard.
In line with the Conceptual Framework published by IPSASB and the International Accounting Standards Board (IASB), a liability is defined as a present obligation for an outflow of resources that results from a past event. Looking at social benefits, such as state pension entitlements, satisfying the eligibility requirements would be deemed the past event. So, in practice, once an individual reaches retirement age, is still living and has paid the relevant national insurance contributions, they will be eligible for the benefit.
For IPSAS 42, an entity recognises an expense for a social benefit scheme, measured at the amount of the next payment following satisfaction of the eligibility criteria. A key point to understand is that the satisfaction of eligibility criteria for each social benefit payment is considered a separate past event. This means the liability exists for the next payment only. For example, an individual still needs to be retired and living, etc during the next week or month to receive that next benefit payment, and thus satisfying the eligibility criteria in each instance.
Therefore, it's likely that the liabilities of social benefits will generally be classified as short-term liabilities. These known amounts accounted as short-term liabilities will not need to be discounted to present value. This approach is referred to as the general approach to recognition and measurement in the new standard. The alternative 'insurance approach' is included in IPSAS 42, but requires specific criteria to be met for it to be considered. This criteria includes:
- the social benefit scheme is intended to be fully funded from contributions; and
- there is evidence that the entity manages the scheme in the same way as an issuer of insurance contracts, including assessing the financial performance and financial position of the scheme on a regular basis.
The standard contains guidance on this alternative recognition approach.
As with all accounting standards, there will be supporting disclosures in the financial statements. For example the 'general approach' to recognising social benefits requires entities to disclose information that:
- explains the characteristics of its social benefit schemes; and
- explains the demographic, economic and other external factors that may affect its social benefit schemes.
Governments using this standard will have to consider its implementation for the accounting period beginning on or after 1 January 2022. Although this new standard will increase the transparency around the government’s liabilities for these schemes, it will not have the dramatic impact on the state of public finances that one might expect at first glance. This change in standards will work to bring clarity and insight on the financial impact of social benefit schemes.
This article first appeared in Accountancy Daily.