What IPSAS 42 Is About
Governments hand cash to people who face the hard turns of life: old age, disability, sickness, unemployment, the loss of a breadwinner. These payments are called social benefits, and they are some of the largest sums a government pays out. IPSAS 42 sets out how the entity that pays them records the cost and the amount it owes.
It answers two questions. When does a social benefit become an expense and a liability? And how much do you put in the books? The whole standard turns on a single idea about timing.
The big idea
Recognise an expense and a liability only for the next payment whose eligibility criteria a person has already met.
Do not put the whole stream of future payments on the books. The future payments are not yet owed.
IPSAS 42 has no IFRS equivalent, because the private sector does not pay social benefits. It is a public-sector standard. Take care to keep it apart from IPSAS 39, which covers benefits paid to the government’s own employees. A social benefit goes to citizens because of a social risk, not to staff because of their service.
The Key Terms
| Term | What it means | In our case |
|---|---|---|
| Social benefit | A cash transfer to specific people who meet eligibility criteria, to ease a social risk | The monthly old-age grant |
| Social risk | An event tied to a person, like age, health, poverty or unemployment, that harms their welfare | Reaching old age |
| Eligibility criteria | The conditions a person must meet to receive a payment | Aged 70 or older, resident, alive, registered |
| Scheme | The programme through which the benefit is paid | The Older Persons Cash Transfer |
The Older Persons Cash Transfer
A State Department for Social Protection runs a monthly cash transfer for the elderly. The facts are these:
| Fact | Detail |
|---|---|
| Who is paid | Citizens aged 70 or older who are resident, alive and registered on the scheme |
| How much | KSh 2,000 a person each month |
| How many | 500,000 eligible people |
| When it is paid | On the 5th of each month, for the month just ended |
| Funding | Paid from tax revenue, not from contributions by the recipients |
| Reporting date | 31 December |
All figures are in KSh.
How IPSAS 42 Works, Step by Step
A social benefit moves through three questions, in order.
| Step | The question | Where it leads |
|---|---|---|
| 1. Is it in scope? | Is this payment a social benefit at all? | If not, another standard applies |
| 2. When is it owed? | Have the criteria for the next payment been met? | If yes, recognise the expense and liability |
| 3. How much? | What is the best estimate of that next payment? | Measure, then reduce it as you pay |
Stage 1: Is the Grant a Social Benefit?
A payment is a social benefit only if it meets all three parts of the definition.
The three-part test
It is a cash transfer to specific individuals or households who meet eligibility criteria.
It eases a social risk, an event tied to the person such as age, health, poverty or unemployment.
It addresses the needs of society as a whole.
Apply it to the old-age grant. It is cash to specific people who meet the age and residence criteria. It eases the social risk of old age. It serves a need of society. All three parts hold, so it is a social benefit, and IPSAS 42 applies.
What falls outside IPSAS 42
Several payments look similar but belong elsewhere. Keep them out.
| Payment | Why it is outside | Where it belongs |
|---|---|---|
| A pension paid to retired civil servants | It is pay for past service, not a social risk | IPSAS 39, Employee Benefits |
| Free vaccination for every child | It is a service, not a cash transfer | A service under IPSAS 19, not IPSAS 42 |
| Cash relief after a regional flood | The risk is geography, not a personal characteristic | Outside IPSAS 42 |
| A true insurance contract | Insurance is a scope exclusion | The insurance accounting standard |
Stage 2: When Does the Grant Become a Liability?
The past event that creates the liability is the moment a person satisfies all the eligibility criteria for the next payment. At that point the entity has a present obligation, so it recognises a liability, and it recognises the expense at the same time.
At 31 December, the people on the scheme have lived through December, stayed resident and stayed registered. So the criteria for the December payment, due on 5 January, are already met. The entity recognises that payment now.
Dr Social benefit expense 1,000,000,000 Cr Social benefit payable 1,000,000,000
That is 500,000 people times KSh 2,000. When the cash goes out on 5 January, the payable is cleared.
Dr Social benefit payable 1,000,000,000 Cr Cash 1,000,000,000
The Trap: Only the Next Payment
Here is where many go wrong. The liability covers the next payment alone. It does not cover the long stream of payments a person may receive for the rest of their life. Those future payments depend on the person staying alive and eligible, which are future events, so there is no present obligation for them yet.
Next payment, not the whole life
A person aged 70 may live another 15 years, which is 180 monthly payments of KSh 2,000, a total of KSh 360,000.
The liability at the reporting date is one payment, KSh 2,000, not KSh 360,000.
This is the sharp line between IPSAS 42 and IPSAS 39. An employee defined benefit puts the whole future obligation on the books. A social benefit puts only the next payment. A good test to carry into any question: do not ask how long the person may receive the benefit, ask whether they have met the criteria for the next payment.
Stage 3: How Much Is the Liability?
Measure the liability at the best estimate of the payments the entity will make to settle the present obligation, which is the next payment. Most social benefits are paid within a month, so the liability is short-term and there is no discounting. Discount only where the next payment will not be made for more than twelve months and the effect is material. Review the estimate at each reporting date, and reduce the liability as payments are made.
When the payment period straddles the reporting date
Sometimes a payment covers a period that crosses the year-end. Suppose the grant of KSh 2,000 paid on 15 January is for the month from 16 December to 15 January. At 31 December only part of that period has passed, 16 days of 31. The entity recognises the portion for which the eligibility criteria have been satisfied by the reporting date, about KSh 1,032 a person, and weighs the chance that some people cease to be eligible before the payment is due.
Paying Before the Criteria Are Met
If the entity pays a grant before the person has met the criteria for that payment, it has not yet incurred the expense. It records a prepayment, an asset, not an expense. The expense follows once the criteria are met. If the advance cannot be recovered, it becomes an expense at that point.
Say the department pays the January grant early, on 28 December, before anyone has lived through January. At 31 December this is a prepayment.
Dr Prepaid social benefit (asset) 1,000,000,000 Cr Cash 1,000,000,000
After Recognition, and When Eligibility Ends
The liability is reduced as the entity pays. Any gap between the cash paid and the carrying amount of the liability goes to surplus or deficit in the period it is settled. Where a liability was discounted, it is unwound, with interest expense each period. When a person stops meeting the criteria, by dying with no survivor benefit, by starting work, or by passing the time limit of the scheme, no further liability arises for them. There is no large closing entry, because the entity only ever recognised one payment at a time.
The Insurance Approach: An Option for Funded Schemes
Some schemes are not paid from general tax. They are funded by contributions from members, managed so that the contributions are meant to cover the benefits in full, like an insurance pool. For a scheme that is intended to be fully funded from contributions and is managed that way, the entity may choose to use the insurance approach, and account for it like an insurance contract instead of using the general approach above. The Older Persons Cash Transfer is funded from tax, so it uses the general approach.
Disclosure
The notes explain the schemes the entity runs: who they cover, the benefits, and the eligibility criteria. They explain the demographic, economic and other outside factors that could change the cost, such as an ageing population. Where a scheme is funded by contributions, the notes cross-refer to information about those contributions. The standard also looks for information about future cash flows where it is material to understanding the scheme.
Common Mistakes
| Mistake | The correct position |
|---|---|
| Putting the whole future stream of payments on the books | Recognise only the next payment whose criteria are met |
| Recording a civil servant pension here | That is an employee benefit under IPSAS 39 |
| Treating cash to a flood-hit region as a social benefit | The risk is geography, not a personal characteristic |
| Expensing a grant paid before the criteria are met | It is a prepayment asset until the criteria are met |
| Discounting every liability | Discount only if the next payment is over twelve months away and material |
| Calling a free public service a social benefit | A service is not a cash transfer, so it falls under IPSAS 19, not IPSAS 42 |
Practice Questions and Solutions
Try each before opening the solution.
Question 1: In scope or not?
Decide whether IPSAS 42 applies to each: (a) a monthly disability grant to citizens certified as disabled; (b) a pension paid to retired teachers; (c) free primary schooling for all children; (d) emergency cash to households in an area hit by drought.Show worked solution
(a) is a social benefit: cash to specific people, easing the social risk of disability. (b) is an employee benefit under IPSAS 39. (c) free primary schooling is a service, not a cash transfer, so it is outside IPSAS 42 and is considered under IPSAS 19 guidance on collective and individual services. (d) is tied to geography rather than a personal characteristic, so it is not a social benefit.
Question 2: Recognise the next payment
A State Department pays a disability grant of KSh 3,000 a month to 200,000 eligible people, on the 5th of the next month. At 31 December all of them have met the criteria for the December payment. Show the entry.Show worked solution
200,000 times KSh 3,000 is KSh 600,000,000.
Dr Social benefit expense 600,000,000 Cr Social benefit payable 600,000,000
Question 3: How much for the whole scheme?
A scheme pays 100,000 pensioners KSh 1,500 a month. The department expects the scheme to run for many years. How much liability does it recognise at the reporting date, once the latest month’s criteria are met?Show worked solution
Only the next payment: 100,000 times KSh 1,500, which is KSh 150,000,000. The future months are not yet owed, so they are not recognised, however long the scheme is expected to last.
Question 4: Paid in advance
To beat the holiday rush, the department pays February’s grant of KSh 80,000,000 on 30 January, before anyone has lived through February. How is this shown at 31 January?Show worked solution
The criteria for the February payment are not yet met, so it is not an expense. It is a prepayment.
Dr Prepaid social benefit (asset) 80,000,000 Cr Cash 80,000,000
Question 5: A long-dated benefit
A scheme will make its next payment to a group of beneficiaries in eighteen months, and the amount is large. How does the measurement differ from the monthly grant?Show worked solution
The next payment is more than twelve months away and the effect is material, so the liability is discounted to reflect the time value of money. Each period after that, the liability is unwound, with interest expense, until it is settled.
Key Lines to Remember
- A social benefit is cash to specific people who meet criteria, to ease a social risk and serve society.
- Keep it apart from employee pensions (IPSAS 39) and from services given to everyone.
- The past event is meeting all the eligibility criteria for the next payment.
- Recognise the expense and the liability at that point, for the next payment only.
- Never put the whole future stream of payments on the books.
- Measure at the best estimate; it is usually short-term, so discount only if the next payment is over a year away.
- A grant paid before the criteria are met is a prepayment asset, not an expense.
- A fully contribution-funded scheme may instead use the insurance approach.
