Practical Insights for Navigating the New IPSAS 47 Revenue

Practical Insights for Navigating the New IPSAS 47 Revenue

IPSAS 47 is a new standard on revenue effective for periods beginning on or after 1 January 2026. The standard brings significant changes to how revenue is recognised and is based on the principles in IFRS 15 Revenue from Contracts with Customers but aligned to the public sector context.

IPSAS 47 replaces the following standards:

·    IPSAS 9 Revenue from Exchange Transactions

·    IPSAS 11 Construction Contracts

·    IPSAS 23 Revenue from Non-exchange Transactions

IPSAS 47 covers both exchange and non-exchange transactions, which are referred as transactions with and without binding arrangements in the standard. 

A binding arrangement confers both rights and obligations, enforceable through legal and equivalent means, on the parties to the agreement. “Equivalent means” captures enforcement outside the judicial system that is similar to the force of law e.g., regulations, including legislation, executive authority, cabinet or ministerial directives).

Revenue transactions with binding arrangements

The accounting model for revenue transactions with binding arrangements is primarily aligned with IFRS 15 Revenue from Contracts with Customers but has been adapted and expanded for operability in the public sector.

The five-step model for recognition of revenue is summarized below:

·    Binding arrangement model criteria are met – approval and commitment by the parties to the respective obligations, identification of each party’s rights and payment terms, arrangement has economic substance, and collection of the entitled consideration is probable

·    Identify compliance obligations (distinct deliverables) – there should be at least one compliance obligation otherwise it is not a binding arrangement

·    Determine the transaction consideration – may be complex as it may include fixed, variable amounts, significant financing component or non-cash consideration 

·    Allocate transaction consideration to compliance obligations based on stand-alone values (these may need to be determined using estimation techniques)

·    Recognize revenue at a point in time or over time as compliance obligations are satisfied 

Since the satisfaction of compliance obligations and exchange of resources may not be at the same time, a binding arrangement asset or liability may be recognized. A binding arrangement asset is recognized where an entity satisfies compliance obligations prior to receiving the resources. A binding arrangement liability is recognized where an entity has received the resources but not satisfied compliance obligations. Revenue is only recognised when or as compliance obligations are satisfied. Therefore, a key consideration in IPSAS 47 is identifying compliance obligations. 

Revenue transactions without binding arrangements

Unlike transactions with binding arrangements where there are enforceable rights and enforceable obligations, a transaction without binding arrangements has either of the following:

·    Unenforceable right and unenforceable obligation

·    Enforceable right but unenforceable obligation

·    Unenforceable right but enforceable obligation

An example of enforceable right but unenforceable obligation is taxes. The government can enforce payment from a taxpayer but is not required to use the revenue to provide specific services to the taxpayer.

Revenue from transactions without binding arrangements is recognized when the entity satisfies any enforceable obligations associated with the inflow of resources. If the entity does not have an enforceable obligation associated with the inflow of resources, revenue is recognised immediately.

Impact on public sector organizations

Some public sector organizations have different revenue streams, for example, assessed contributions, voluntary contributions, grants, donations, project-based funding. Though some of these may come with defined deliverables, it needs to be assessed whether they are in substance binding arrangements or not.    

Identifying compliance obligations is a key part of the standard. It is important to review whether there are one or more compliance obligations, and this may require use of judgement. A deliverable e.g., goods or services, must be distinct in the context of the arrangement to be called a separate compliance obligation.

The other areas of significant judgements in IPSAS 47 could be measuring progress using input or output method and estimating variable consideration, if any. 

The implementation of IPSAS 47 needs changes to systems, processes and controls. This is because the legacy systems may not be able to track compliance obligations, their satisfaction and allocation of transaction prices across multiple deliverables.  

Lastly, the changes in timing of revenue recognition due to adoption of IPSAS 47 must be communicated clearly in advance to the various stakeholders. 

Click here for an example on whether a transaction has binding arrangements or not.

Example

A state education department (SED) receives funding of CU10 million from the central government (CG) to fund its digital skills programs. The agreement requires funding to be spent on programs with the goal of improving digital skills in the state. 

If the SED incurs expenditures to improve digital skills in the state, it is able to enforce its right to receive funding from CG. The agreement does not specify the time period in which the funds are to be spent, any requirement to fund specific digital skills programs or how CG will receive or verify information on how the funds were spent. 

Although SED has enforceable right to resources if it incurs eligible expenditure, it does not have an enforceable obligation because the CG does not have the ability to enforce how SED uses funds in a specific way (e.g., on specific digital skills programs) or within a specific time period. The CG does have a realistic way to enforce the requirement to spend all of the funds. Therefore, this is a transaction without binding arrangement. 

The conclusion would be different i.e., it would be a transaction with binding arrangement if the agreement specifies how the entity is to report its spending to the CG, that any misused or unused funds are to be returned and the CG is able to enforce these requirements.