Do you know what statutory receivables are and how to account for them?

GRAP 108 on Statutory Receivables issued by the ASB is effective from 1 April 2019. This means that entities that apply Standards of GRAP need to consider the Standard in preparing their financial statements for 31 March 2020 or 30 June 2020.

What are statutory receivables?

Statutory receivables are receivables that arise from legislation, supporting regulations, or similar means; and are settled in cash or another financial asset. “Supporting regulations or similar means” includes regulations supporting laws, by-laws or other documents issued in terms of legislation, such as ministerial orders and cabinet or municipal council decisions. Examples of statutory receivables include those receivables related to property taxes, fines for breaches of legislation, levies, and appropriations, grants and transfers outlined in the relevant division of revenue act. Statutory receivables are also known as compulsory transactions.

Are statutory receivables the same as financial instruments?

“Statutory receivables” are not financial instruments. Financial instruments only arise from a contract. The key difference between a contractual and a statutory arrangement is that contracts are entered into by willing parties to the arrangement.
Receivables that are financial instruments are accounted for using GRAP 104 on Financial Instruments and are measured initially at fair value based on prevailing ‘market terms’. Because there is no willing party in statutory arrangements, it is difficult to determine the ‘market terms’ envisaged in GRAP 104. As a result, the measurement of statutory receivables is different to other receivables.

How are statutory receivables measured initially?

As receivables arise from a revenue transaction, the initial measurement of statutory receivables is largely dependent on the measurement outlined in GRAP 9 on Revenue from Exchange Transactions and GRAP 23 on Revenue from Non-exchange Transactions (Taxes and Transfers), to be read in conjunction with GRAP 108. The revenue Standards indicate the following:

• GRAP 9 – Fair value of the consideration received or receivable.
• GRAP 23 – Fair value at the date of acquisition.

GRAP 108 explains that the measurement in the revenue Standards should be read to mean the “transaction amount” as outlined in GRAP 108. The transaction amount is “the amount specified in, or calculated, levied or charged in accordance with, legislation, supporting regulations, or similar means”. The effect is that fair value in the revenue related Standards of GRAP and GRAP 108 should be determined solely based on what is prescribed in legislation. This is important because it rules out the need to assess the impact of providing credit, or allowing payment over a period of time, e.g. for goods and services provided, taxes, fines, grants, appropriations or similar transfers, on initial recognition.

How are statutory receivables measured at each reporting date?

Given the lack of a market for compulsory transactions, statutory receivables are measured at each reporting date using the cost method as outlined in GRAP 108. Applying the cost method means that the initial transaction amount is only adjusted for the following:

• Interest or other penalties (if required to be charged in terms of legislation or similar). Interest is charged based on the nominal rate outlined in legislation rather than using a market rate or effective interest rate as outlined in GRAP 104.
• Payments received and other amounts that are derecognised by the entity, e.g. amounts waived by the entity.
• Impairment losses.

An entity assesses at each reporting date whether there is any indication that an impairment loss should be recognised by comparing the carrying amount of the receivable to the cash flows the entity expects to receive. The cash flows are discounted if the time value of money is material. While there are specific indicators that identify the need to asses if an impairment loss exists, entities should also consider the effect of delayed payment and whether this affects the carrying amount of the receivable. 

Are there specific disclosure requirements for statutory receivables?

As statutory receivables are different from other receivables, there are specific disclosures required about how these transactions arise, how the transaction amount is determined, whether interest or levies are charged (and if yes, how), how impairment is assessed and if a discount rate is applied.

Importantly, the carrying amount of statutory receivables is disclosed separately in the notes to the financial statements from receivables that are financial assets and other receivables.

Note: this is not a comprehensive list of disclosures in GRAP 108 and focuses on aspects specific to statutory receivables.

What should an entity do to prepare to adopt GRAP 108 and are there transitional provisions?

The Standard is effective for financial years commencing on or after 1 April 2019. The Standard should be applied retrospectively with the exception of (a) the impairment principles that are applied prospectively, and (b) amounts previously derecognised need not be reassessed for derecognition using GRAP 108.

Although the Standard is effective from 1 April 2019, entities are allowed a three-year period within which to change the classification (e.g. from another type of receivable to a statutory receivable) and measurement (e.g. from fair value, amortised cost or another basis to the cost method) of their statutory receivables. This three-year period is voluntarily adopted by entities. Entities should comply with GRAP 108 by 31 March 2022 or 30 June 2022 (whichever is applicable). Where the three-year transitional relief is applied, certain information should be provided to users of the financial statements during this period.

In preparing for the adoption of the Standard, entities should, among other actions:

• review their revenue transactions and identify how they arise, i.e. through contracts or through other means;
• once the transactions have been identified, compare existing accounting policies to the principles in GRAP 108 to identify differences and update policies to align with GRAP 108; and

review existing processes to support the implementation of the new policies, particularly understanding how the information required to be disclosed in the financial statements will be sourced.