2013-11 Assets, Contingent Assets, Contractual Rights

Statement of Principles
Assets, Contingent Assets and Contractual Rights

Prepared by: Public Sector Accounting Board August 2013
Comments are requested by November 29, 2013
PSAB
Commenting on this Statement of Principles

This Statement of Principles reflects proposals made by the Public Sector Accounting Board (PSAB). It presents key principles that the Board expects to include in a future exposure draft. Individuals, governments and organizations are invited to send written comments on this Statement of Principles. Comments are most helpful if they are related to a specific principle, paragraph or group of paragraphs. Any comments that express disagreement with the proposals in the Statement of Principles should clearly explain the problem and include a suggested alternative, supported by specific reasoning. All comments received will be available on the website shortly after the comment deadline, unless confidentiality is requested. The request for confidentiality must be stated explicitly within the response. For your convenience, a PDF response form has been posted with this document. You can save the form both during and after completion for future reference. You are not restricted by the size of the interactive comment fields in the response form and there is also a general comments section. Alternatively, you may send written comments by email in Word format to: ed.psector@cpacanada.ca To be considered, comments must be received by November 29, 2013, addressed to: Tim Beauchamp, Director Public Sector Accounting Chartered Professional Accountants of Canada 277 Wellington Street West Toronto, Ontario M5V 3H2
Highlights
The Public Sector Accounting Board (PSAB) proposes, subject to comments received on this Statement of Principles and following its due process, to expose three proposed new Sections on assets, contingent assets and contractual rights. The Sections would apply to public sector entities that base their accounting policies on the CICA Public Sector Accounting (PSA) Handbook. PSABs Conceptual Framework project may have implications on the proposals in this Statement of Principles to the extent that a change to the assets definition is proposed. Implications of the Conceptual Framework project, if any, will be addressed as they arise. Main features The main features of this Statement of Principles are as follows: Part I Assets Additional guidance on the definition of assets is provided. Disclosure of assets that are not recognized is required. Part II Contingent Assets Contingent assets are defined. Disclosure of contingent assets is required when the occurrence of the confirming future event is likely. Part III Contractual Rights Contractual rights are defined. Disclosure of contractual rights is required. Other proposals Included in this Statement of Principles are other potential amendments to existing standards that could arise from the acceptance of the proposals on assets, contingent assets and contractual rights. They relate to improvements in wording and suggested deletions. Comments requested PSAB welcomes comments from individuals, governments and organizations on all aspects of the Statement of Principles. When comments have been prepared as a result of a consultative process within an organization, it is helpful to identify generically the source of the comment in the response. This will promote understanding of how the proposals are affecting various aspects of an organization.
ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS
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Comments are most helpful if they relate to a specific principle, paragraph or group of paragraphs. Any comments that express disagreement with the proposals in the Statement of Principles should clearly explain the problem and include a suggested alternative, supported by specific reasoning, for alternative wording. Supporting reasons for your comments are most valuable when they demonstrate how the Statement of Principles proposals, or your alternatives: produce more relevant information for accountability and decision-making by external users; improve the representation of the substance of the underlying transaction or event; contribute to improved measures and understanding of financial position and annual results; facilitate enhanced comparability; and provide sufficient information for external users to understand the financial statements. Please respond to the following questions and explain your reasoning: Effects Analysis 1. Are there other implications of the proposals that should be considered? If so, please provide a detailed explanation. Part I Assets 1. Is the proposed guidance relating to the definition of assets useful? Are there other aspects that should be considered? 2. Do you agree with how PSAB has dealt with service potential in paragraph .052? 3. Do you agree with the proposed disclosure requirements? Part II Contingent Assets 1. Do you agree with the proposed definition of contingent assets? 2. Do you find the proposed guidance on the contingent assets useful? Are there other aspects that should be considered? 3. Do you agree with the proposed disclosure requirements? 4. Do you believe that there is some threshold (i.e., virtual certainty) at which contingent assets should be recognized? 5. In some cases, likely contingent assets may be recognized as part of a reduction to a contingent liability (refer to paragraph .111). Do you agree with limiting the recognition of contingent assets to this situation only? Part III Contractual Rights 1. Do you agree with the proposed definition of contractual rights? 2. Do you find the proposed guidance on the contractual rights useful? Are there other aspects that should be considered? 3. Do you agree with the proposed disclosure requirements?
ii | STATEMENT OF PRINCIPLES AUGUST 2013
Assets, Contingent Assets and Contractual Rights

TABLE OF CONTENTS
PARAGRAPH
Purpose and scope ............................................................................ The need for a standard .................................................................... Effects analysis .................................................................................. PART I ASSETS ............................................................................. Economic resources.......................................................................... Control ................................................................................................ Past transactions or events .............................................................. Future economic benefits ................................................................. Disclosure .......................................................................................... PART II CONTINGENT ASSETS.................................................... Characteristics of contingent assets .............................................. Existence uncertainty ........................................................................ Disclosure vs recognition ................................................................. Disclosure .......................................................................................... PART III CONTRACTUAL RIGHTS................................................ Defining contractual rights ............................................................... Reporting of contractual rights ........................................................ Disclosure .......................................................................................... APPENDIX A Decision tree APPENDIX B Other proposals APPENDIX C Abbreviations and acronyms
.001-.005 .006-.008 .009-.011 .012-.068 .016-.024 .025-.042 .043-.050 .051-.062 .063-.068 .069-.126 .075-.083 .084-.092 .093-.117 .118-.126 .127-.152 .132-.142 .143-.150 .151-.152
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PURPOSE AND SCOPE

.001 This Statement of Principles is intended to result in three new CICA Public Sector Accounting (PSA) Handbook Sections on assets, contingent assets and contractual rights. The purpose of this Statement of Principles is to propose: (a) additional guidance and general disclosure requirements for assets; (b) a definition of and standards on disclosure requirements for contingent assets; and (c) a definition of and standards on disclosure requirements for contractual rights. This Statement of Principles does not include proposals for: (a) changing the existing definition of assets and the general recognition criteria set out in the FINANCIAL STATEMENT CONCEPTS, Section PS 1000, which will be reviewed as part of the Public Sector Accounting Boards (PSAB) Conceptual Framework project; and (b) specific types of assets, contingent assets or contractual rights. This Statement of Principles does not address the recognition of intangibles, inherited natural resources and Crown lands, and art and historic treasures, which may meet the definition of assets but are not recognized in accordance with FINANCIAL STATEMENT CONCEPTS, paragraphs PS 1000.57-58. Recognition of these items is a separate and distinct issue requiring further study. For the purposes of this Statement of Principles, the term public sector entity has been used to mean governments and those entities applying the PSA Handbook.
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THE NEED FOR A STANDARD

.006
FINANCIAL STATEMENT CONCEPTS, Section PS 1000, provides a definition of
assets and some limited guidance. Providing additional guidance will assist preparers and auditors in determining whether an item meets the definition. .007
FINANCIAL STATEMENT PRESENTATION, Section PS 1201, provides a general
definition of contingencies as well as some disclosure requirements for contingent assets. Including a definition of contingent assets and providing guidance for disclosure requirements for contingent assets would enhance users understanding of what constitutes contingent assets as well as when and how they should be disclosed. .008 Public sector entities enter into contracts from which rights to economic resources arise. CONTRACTUAL OBLIGATIONS, Section PS 3390, provides a definition of contractual obligations and requires disclosure of certain obligations in order to provide users with information on expected future liabilities.
2 | STATEMENT OF PRINCIPLES AUGUST 2013
Information on expected future assets and related revenue is no less important as it offers information about resources that may be available to meet a public sector entitys obligations or to finance future operations. Providing information on both contractual rights and contractual obligations allows for a balanced view of a public sector entitys future revenue and expenditures, and enhances users understanding of the nature and extent of its resources and affairs.
EFFECTS ANALYSIS
.009 Part I provides enhanced guidance to assist in determining whether an item meets the definition of assets. It also proposes disclosure of unrecognized assets. This may result in public sector entities reassessing items that meet the definition and in additional disclosures. Part II proposes a definition of and disclosure requirements for contingent assets. This may result in reassessment of items that meet the definition and additional information being disclosed. Part III proposes a definition of and disclosure requirements for contractual rights. Since the PSA Handbook does not provide guidance on contractual rights, this proposal may result in public sector entities having to determine their contractual rights and disclose information about them.
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.011
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PART I ASSETS
.012
FINANCIAL STATEMENT CONCEPTS, Section PS 1000, provides a definition of
assets, key characteristics of assets and limited guidance on some of the key components of the assets definition. This includes guidance on what is meant by future economic benefits and control of an asset. Section PS 1000 also provides guidance on financial assets, non-financial assets and tangible capital assets. .013 Assets are defined as economic resources controlled by a government as a result of past transactions or events and from which future economic benefits are expected to be obtained.
FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.36, also lists the
.014
following three essential characteristics of assets: (a) they embody a future benefit that involves a capacity, singly or in combination with other assets, to provide future net cash flows, or to provide goods and services; (b) the government can control access to the benefit; and (c) the transaction or event giving rise to the government's control of the benefit has already occurred. .015 The existing guidance on assets and various components of the assets definition is limited and can be improved to assist in determining whether an item meets the definition of an asset while ensuring that the proposed guidance is more appropriate for the public sector. To achieve this, a review of existing guidance has been conducted and proposed guidance on the key components of the assets definition is provided. This includes addressing questions of what is meant by: (a) economic resources; (b) control; (c) past transactions or events; and (d) future economic benefits.
ECONOMIC RESOURCES
.016 The following guidance on economic resources is included in FINANCIAL STATEMENT OBJECTIVES, paragraph PS 1100.22: Economic resources are scarce means that are useful for carrying out economic activities, such as consumption, production and exchange. Financial and non-financial resources comprise the economic resources of a government. .017 This guidance is very limited and oriented to the private sector. It could be improved upon by emphasizing activities that are predominant in the public sector, which include the redistribution of wealth and the provision of goods and
services. The guidance can also be enhanced by better explaining what is meant by a resource being an economic resource in the public sector. .018 Other standard setters commonly describe economic resources as something of value, a useful or valuable possession or means of supplying a want. 1 To embody value, there must be some restriction on its availability. Economic resources often include productive resources, products, money, claims to receive money or ownership of interest in an enterprise. They are described as useful in carrying out economic activities, such as consumption, exchange, production of net cash inflows, reduction of net cash outflows, and provision of goods and services.
Proposed guidance .019 Economic resources are resources that embody value. Economic resources embody value if: (a) they are capable of being used in achieving the public sector entitys objectives; and (b) there is some restriction on their availability. Economic resources are items that enable the entity to meet its objectives, such as the provision of public goods and services, redistribution of wealth, generation of cash inflows or reduction of cash outflows. Without a present economic resource, future economic benefits cannot be obtained. For example, a fire truck (the economic resource) needs to exist before it can provide fire suppression services (the future economic benefits). To embody value as an economic resource there must also be some restriction on its availability. For example, the air we breathe generally cannot be an economic resource unless access to it is restricted. Economic resources can arise from, but are not limited to, the following: (a) agreements or contracts (for example, accounts receivable and leases); (b) another governments legislation (for example, transfers receivable); (c) governments own legislation (for example, taxes, fines and penalties); (d) voluntary contributions (for example, donations); or (e) construction and development (for example, roads). Economic resources can be: (a) financial in nature (for example, cash, claims to cash and investments); or (b) non-financial in nature (for example, tangible capital property, prepaid items and inventories of supplies).
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Other standard setters reviewed that address this topic include: FASAB, FASB, IASB, IPSASB.
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CONTROL
.025 The definition of assets specifies that for a government to have an asset, the government needs to control the economic resource. Further, FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.38, provides additional guidance on control: For an asset to be a government's asset, that government must control the future economic benefit associated with the asset to the extent that it can benefit directly from the asset and generally can deny or regulate access to that benefit by others. For example, the direct benefits of education and health care programs accrue to and are controlled by the individuals who are educated or treated and healed. Therefore, the costs of such programs, which are often called "investments", are excluded from being assets of the government. .026 The existing PSA Handbook guidance essentially indicates that for an asset to be an asset of a public sector entity that entity needs to control the economic resource. It further needs to be able to control access to the future economic benefits and, therefore, be able to obtain them and deny or regulate access to those benefits by others. For example, for a fire truck to be an asset of a public sector entity, that entity must first control the fire truck (the economic resource). The entity must also be able to benefit from it through provision of fire suppression services (the future economic benefits) as well as be able to restrict access to those services to others. The existing guidance on control of an asset states that a government needs to benefit directly from the asset (refer to paragraph .025). The inclusion of such wording may cause confusion as many economic resources, which are controlled by a public sector entity, are used to provide services to the public. Hence, it is the public that may be seen as benefiting directly. For example, a bus is used to provide transportation services. Although the public sector entity benefits from the use of the economic resource (the bus) by meeting its objective of service provision, one could also argue that the direct benefit (transportation) flows to the public. Therefore, the removal of the term direct may remove the confusion as to which party benefits directly and allows the user to concentrate on the meaning of control of an asset, which entails benefits from the asset and the ability to deny or regulate access to those benefits by others. The removal of the term direct does not interfere with the robustness of the guidance on control of an asset and would not result in inclusion of program costs, such as education, as assets. This is because the assets definition and the guidance on control of an asset require the entity to control both the economic resource and access to the future economic benefits. In the case of education programs, the public sector entity cannot control the economic resource (the knowledge obtained through the education programs) or access to the future economic benefits (the economic advantages gained through the knowledge).
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The economic resource and access to the future economic benefits are controlled by the individuals who are educated. .029 The control guidance in GOVERNMENT REPORTING ENTITY, Section PS 1300, contains a notion of risk of loss to the government. It states that: control is the power to govern the financial and operating policies of another organization with expected benefits or the risk of loss to the government from the other organization's activities. An entity that controls an asset has access to benefits associated with the asset, a concept already depicted in the guidance on control of an asset, but it also bears the risks associated with the asset. For example, a public sector entity may hold land that may have a future environmental clean-up cost associated with it. Another example would be an investment the value of which may decline and result in a loss. Therefore, since the notion of risk is very much part of the implications of having control of an asset, it may be appropriate to include it in the guidance on control of an asset. Most standard setters agree on the meaning of control, which is generally described as the ability of the government to use or otherwise obtain the future economic benefits from the assets and to deny or regulate access to those benefits by others. 2 The Government Accounting Standards Boards (GASB) guidance indicates that control of an asset is the ability of the government to utilize the resources present service capacity (existing capability to enable the government to provide services) and to determine the nature and manner of use of the present service capacity embodied in the resource. Generally, the government controlling the asset is said to have the ability to determine whether to: (a) directly use the present service capacity to provide services to citizens; (b) exchange the present service capacity for another asset, such as cash; or (c) employ the asset in any of the other ways it may provide benefit. The International Public Sector Accounting Standards Boards (IPSASB) Conceptual Framework Exposure Draft 2, Elements and Recognition in Financial Statements, issued in November 2012, provides very similar guidance on control of a resource to that of GASB and, in addition, includes indicators of control that may indicate, but not determine, that control exists. These indicators include: (a) legal ownership; (b) access to or, conversely, ability to deny or restrict access to the resource; (c) the means to ensure that the resources are used to achieve its objectives; and
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Other standard setters reviewed that address this topic include: AASB, AcSB, FASAB, FASB, GASB IASB, IPSASB, UK ASB.
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(d) .034
the existence of an enforceable right to service potential or economic benefits arising from a resource.
Standard setters that provide further guidance on control also agree that ownership, possession or legal enforceability are indicators of control but do not necessarily confirm control of an asset. On the other hand, external restrictions on the entitys use of the asset do not necessarily mean that the entity does not control the asset. In drafting the proposed guidance on control of an asset, PSAB has also considered the guidance on control provided in GOVERNMENT REPORTING ENTITY, Section PS 1300, and in PUBLIC SECTOR GUIDELINE, PSG-2, Leased Tangible Capital Assets, in order to enhance the existing guidance on control of an asset and keep it consistent to the extent possible and practicable.
.035
Proposed guidance .036 For an economic resource to be a public sector entitys asset, the public sector entity must control the economic resource and access to the future economic benefits associated with the economic resource to the extent that it can: (a) determine how the economic resource will be used; (b) benefit from the economic resource through future net cash inflows, reduction of cash outflows or capacity to provide goods and services; (c) deny or regulate access to those benefits by others; and (d) be exposed to the risks associated with the economic resource. A public sector entitys control of an economic resource is evidenced by the ability to exchange, hold or use the resource to provide goods and services or to obtain cash. A public sector entity can have control even though it is not exercised as control exists by virtue of the entitys ability to do so. Some economic resources are subject to certain external restrictions. For example, there may be external restrictions imposed on the public sector entitys own assets, as is the case with some sinking fund investments. Such restrictions on the use of an economic resource do not negate the public sector entitys control of the economic resource. Although control may be seen as applying to an asset as a whole, the concept can also be applied to individual rights that make up the asset. For example, lease agreements unbundle the economic benefits embodied in a single leased property. This may give the lessee the right to possess and use the property and the lessor the right to receive rents and any residual value. Thus, both parties may have assets corresponding to their respective rights. Possession or ownership of an economic resource normally entails control of the economic resource and access to the future economic benefits, but that is not always the case. Whereas control of an economic resource and of access to the
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future economic benefits is an essential characteristic of an asset, possession or ownership is not. For example, a public sector entity may control the economic resource and access to the future economic benefits through a capital lease arrangement yet not own the economic resource. .041 A public sector entitys ability to regulate an economic resource does not, in and of itself, constitute control of an asset. A public sector entity may establish the regulatory environment in an industry or sector within which organizations operate and impose conditions or sanctions on their operations. Such ability does not constitute control by a public sector entity of the assets deployed by these organizations. For example, a pollution control authority may have the ability to close down the operations of entities that are not complying with environmental regulations. However, this power does not constitute control because the pollution control authoritys interest extends only to the regulatory use of the economic resources and does not include the ability to control access to the future economic benefits. A public sector entity may act as trustee when it administers trusts on behalf of the beneficiaries specified in the agreement or statute. As trustee, the public sector entity merely administers the assets, following the terms and conditions set out in the agreement. It does not control the asset as it cannot determine how the economic resources will be used and does not have access to the future economic benefits as those benefits flow to the beneficiaries.
.042
PAST TRANSACTIONS OR EVENTS

.043 The PSA Handbook discusses specific past transactions or events giving rise to assets in various Sections of the Handbook. However, broad guidance on past transactions or events that give rise to control of an economic resource, similar to that included in LIABILITIES, Section PS 3200, does not exist. Other standard setters provide that for an entity to have an asset, the past transaction or event giving rise to the entitys control of the asset must have already occurred. 3 According to the U.S. Financial Accounting Standards Board (FASB), the definition excludes from assets items that may in the future become an entitys assets but have not yet become its assets. Further, FASB provides the example that an entity does not acquire an asset merely by budgeting for the purchase of a machine. Also, the Federal Accounting Standards Advisory Board (FASAB) notes that the governments intent or ability to acquire a resource in the future does not create an asset. For the resource to qualify as an asset, the government already must have acquired the resource or otherwise obtained access to the economic benefits or services it embodies to the exclusion of other entities. For example, the mere existence of the governments power to tax is not an asset because, until
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Other standard setters reviewed that address this topic include: AASB, FASAB, FASB, IASB, UK ASB.
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the government has exercised that power by imposing a tax and has access to benefits by virtue of completion of a taxable event, no event has occurred to generate resources and there are no resulting economic benefits that the government can control and use in providing programs and services. Proposed guidance .046 It is the occurrence of a past transaction or event on or before the financial statement date that distinguishes a present economic resource controlled by a public sector entity from an economic resource that may be controlled by a public sector entity in the future. The past transaction or event that gives rise to control of an economic resource resulting from exchange agreements or contracts usually occurs at the point of exchange. This arises when substantially all the benefits and risks of ownership have been transferred to the public sector entity and normally coincides with the disbursement of funds, exchange of other assets or assumption of liabilities. Meeting the eligibility criteria under an authorized transfer program often determines the past transaction or event giving rise to control of an economic resource in non-exchange contracts or agreements. Shared cost agreements (reimbursement arrangements) are an example where the control of an economic resource arises when the recipient incurs eligible expenditures. For guidance on how to account for government transfers, refer to GOVERNMENT TRANSFERS, Section PS 3410. The existence of a public sector entitys legislation containing details of the public sector entitys policy in relation to a particular program, such as taxation is not a past transaction or event that gives rise to control of an economic resource until the taxable event occurs. For guidance on how to account for tax revenue, refer to TAX REVENUE, Section PS 3510. The past transaction or event giving rise to control of an economic resource must have occurred by the financial statement date. Legislation having retroactive application cannot create a past transaction or event. Any economic resources related to that legislation would be accounted for in the current period, not in the period of the effective date of the legislation.
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FUTURE ECONOMIC BENEFITS

.051
FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.36, states that a future
economic benefit entails capacity, singly or in combination with other assets, to provide future net cash flows, or to provide goods and services. This guidance is limited and in need of enhancement in order to further explain what is meant by future economic benefits and how they may arise in the public sector.
.052
The existing guidance contains a notion of a capacity to provide goods and services, which is commonly referred to as service potential. In building the proposed guidance, PSAB considered replacing the current wording of capacity to provide goods and services with a defined term service potential. It was thought, however, that such a change may not add value, is circuitous and may cause confusion among users. Therefore, it was proposed to clearly explain what is meant by such capacity rather than replacing the term and defining it with words that already exist in the guidance on future economic benefits. In their definition of assets some standard setters differentiate between future economic benefits and service potential. 4 Economic benefits involve inflow of cash or cash equivalents, or a capacity to reduce cash outflows, while service potential embodies a capacity to provide goods and services. The private sector standard setters generally use future economic benefits to mean the capacity to provide net cash inflows unless their guidance applies to not-for-profit organizations, where provision of goods and services is key. 5 Overall, regardless of the approach used, standard setters agree that the benefits that flow from the assets include the capacity to provide goods and services, to provide cash inflows or to reduce cash outflows. GASB, in its definition of assets, refers to present service capacity, rather than future economic benefits, which is defined as existing capacity to enable the government to provide services, which in turn enables the government to fulfill its mission. Buildings or artifacts of historical significance are provided as examples of assets with present service capacity that can be directly used in that their preservation and continued existence is a service to society. Other standard setters also provide additional guidance as to how the future economic benefits embodied in an asset may flow to the entity. Examples include ability to use an asset: (a) singly or in combination with other assets in the production of goods or services; (b) to exchange for other assets; (c) to settle a liability; or (d) to distribute to the owners of the entity.
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Proposed guidance .056 Assets embody future economic benefits that allow public sector entities to achieve their objectives. The future economic benefit embodied in an asset is a capacity, singly or in combination with other assets, to provide goods and services, to provide future net cash inflows or to reduce cash outflows.
4 5
Standard setters reviewed that address this topic include: AASB, FASAB, FASB, IASB, IPSASB. Standard setters reviewed that address this topic include: AcSB, GASB, UK ASB.
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.057
Generally, public sector entities provide public goods and services, and redistribute wealth. As some goods and services are provided at no charge or for a reduced fee, the provision of goods and services may not contribute to the net cash inflows of the entity. Consequently, public sector entities rely on taxation, donations and borrowing to finance their operations. Assets of a public sector entity embody the capacity to provide goods and services. For example, assets, such as buses, are used to provide transportation services to the public. Hospital buildings and medical equipment are used to provide health care services. Parks, art and historic treasures provide recreational, educational and research opportunities to the public. Water treatment plants provide goods, such as potable water. Such assets benefit public sector entities as they assist in achieving the entitys primary objective of providing public goods and services. Although profit is not the principal objective of public sector entities, the future economic benefits embodied in an asset may also be in the form of generating future net cash inflows. For example, net cash inflows could be generated from the exchange or sale of a resource for cash or cash equivalents, or from holding cash or investments. Also, some public sector resources generate net cash inflows because they have user fees associated with them. Benefits in the form of net cash inflows relate to resources, such as cash, loans, receivables, inventory for resale and portfolio investments. Net cash inflows and, consequently, cash benefit the public sector entity as cash can be used to purchase or to provide goods and services, redistribute wealth or settle liabilities. The future economic benefits may also take the form of a capacity to reduce cash outflows. For example, this may be the case when betterment of the tangible capital asset reduces the cost of production. The essence of an asset is its future economic benefit. There is a close association between incurring a cost and the generation of an asset. However, not all costs result in a future economic benefit. For example, costs incurred to maintain the current service capacity of an asset do not provide a future economic benefit. Also, a public sector entity may obtain an asset without incurring costs. For example, items that have been donated to the public sector entity may provide the public sector entity with future economic benefits and, hence, satisfy the definition of assets.
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DISCLOSURE
.063 The PSA Handbook provides disclosure requirements for recognized assets. It also provides disclosure requirements for some unrecognized assets. However, it does not provide general disclosure requirements for all unrecognized assets.
.064
On the other hand, LIABILITIES, Section PS 3200, provides a general disclosure requirement for all unrecognized liabilities. For items that meet the definition of a liability but cannot be reasonably measured, Section PS 3200 requires that the nature of the liability be disclosed in the notes together with the reason(s) why a reasonable estimate cannot be made of the amount involved. It would appear that such a general disclosure requirement would apply to all unrecognized assets as well. The disclosure guidance in the Section on assets will differ from that in
LIABILITIES, Section PS 3200. This is due to the fact that FINANCIAL STATEMENT CONCEPTS, Section PS 1000, specifically excludes items, such as
.065
intangibles from recognition whether they can be measured or not (refer to paragraph .004). As a result, the reason for not recognizing an asset is not always an inability to measure it. .066 There are varying requirements among standard setters with regard to disclosure of unrecognized assets.
Proposed guidance .067 An economic resource may meet the definition of an asset. However; (a) it is not capable of being recognized in financial statements because an appropriate basis of measurement and a reasonable estimate of the amount involved cannot be made; or (b) other Sections of the PSA Handbook prohibit its recognition. For unrecognized assets, disclosing the nature of the asset provides information about the economic resources available to the public sector entity.
.068
Principle 1 Information about the nature of assets that are not recognized should be disclosed in notes together with the reason(s) why.
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PART II CONTINGENT ASSETS

.069
FINANCIAL STATEMENT PRESENTATION, paragraph PS 1201.071, provides a
definition of contingencies and some guidance on contingent assets: Contingencies are the result of existing conditions or situations involving uncertainty that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of an asset, the reduction of a liability, the loss or impairment of an asset, or the incurrence of a liability. Contingencies result from such matters as pending or threatened litigation, guarantees of the indebtedness of others, indemnities and provisions related to insurance programs. They also include grants or contributions that are recoverable if certain future events occur or fail to occur. .070 The existing guidance also clarifies that the mere fact that an estimate is involved does not, in and of itself, constitute the type of uncertainty that characterizes a contingent asset. PSABs existing guidance only provides a general definition of contingencies and limited guidance on contingent assets. Including a definition of contingent assets and an explanation of what is meant by the terms included in the definition would provide users with an understanding of what constitutes a contingent asset and assist them in evaluating whether a contingent asset exists. Other standard setters define a contingent asset as a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity. 6 Other standard setters also note that contingent assets usually arise from unplanned or other unexpected events that are not wholly within the control of the entity and give rise to the possibility of an inflow of economic benefits or service potential to the entity. 7 As limited guidance on contingent assets exists and to ensure consistency within the PSA Handbook, CONTINGENT LIABILITIES, Section PS 3300, was also considered in drafting the proposed guidance on contingent assets. Section PS 3300 provides the characteristics of contingent liabilities and further explains what is meant by those characteristics.
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Other standard setters reviewed that address this topic include: AASB, IASB, IPSASB, NZ FRSB, SA ASB, UK ASB. Other standard setters reviewed that address this topic include: AASB, IASB, IPSASB, NZ FRSB, SA ASB, UK ASB.
CHARACTERISTICS OF CONTINGENT ASSETS

Proposed guidance .075 Contingent assets are distinct from assets as they are characterized by the uncertainty related to the existence of an asset at the financial statement date. Contingent assets usually arise from unplanned or other unexpected events that lead to an existing condition or situation the outcome of which is uncertain. The outcome or resolution of the condition or situation after the financial statement date will confirm whether an asset exists. Two basic characteristics of contingent assets are: (a) there must be an existing condition or situation that is unresolved at the financial statement date; and (b) there must be an expected future event that will resolve the uncertainty as to whether an asset exists. The mere fact that an estimate of an amount is involved (measurement uncertainty) does not, in and of itself, constitute the type of uncertainty that characterizes a contingent asset. For example, even though there may be measurement uncertainty related to income tax receivable, there is nothing uncertain about the fact that this asset exists. Any uncertainty is related solely to the amount thereof.
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.078
Existing condition or situation
.079
For a contingent asset to be present, there usually is an unplanned or other unexpected event leading to an existing condition or situation where the evidence indicates that a public sector entity may have an asset. For example, a public sector entity may have incurred an unexpected loss and there is sufficient evidence for potential recovery. The potential for recovery constitutes the existing condition or situation giving rise to a possible asset. It is a possible asset because of the uncertainty around recovery and it is only a future event that will confirm whether the public sector entity has an asset. A public sector entity may have entered into a contract before the financial statement date to purchase land after the year end. This is not a contingent asset because there is no unresolved condition or situation that would indicate that the entity has an asset at year end. The land purchase is a future transaction. Passing legislation that has retroactive application after the financial statement date cannot create an existing condition or situation at the financial statement date. Further, elected or public sector entity officials may announce public sector entity intentions in a period following the financial statement date but before the completion of the financial statements. If a condition or situation did not exist at the date of the financial statements, there is no contingent asset. However, there may be a subsequent event (see SUBSEQUENT EVENTS, Section PS 2400).
.080
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Confirming future event
.082
For a contingent asset to exist, there must also be an expected confirming future event(s) that will resolve the uncertainty. The expected confirming future event provides additional information as to whether a public sector entity has an asset at the financial statement date. The confirming future event does not create an asset it only proves or disproves its existence at the financial statement date. The future confirming event cannot be wholly within the control of the public sector entity. When a public sector entity is involved in a lawsuit, the future confirming event (the resolution of the lawsuit) is not within the control of that public sector entity.
.083
Proposed definition Contingent assets are possible resources that may result in future economic benefits arising from existing conditions or situations involving uncertainty. That uncertainty will ultimately be resolved when one or more future events not wholly within the public sector entity's control occurs or fails to occur. Resolution of the uncertainty will confirm the existence or non-existence of an asset.
EXISTENCE UNCERTAINTY
.084 Contingent assets are characterized by uncertainty as to the existence of an asset at the financial statement date. The PSA Handbook in the CONTINGENT LIABILITIES, Section PS 3300, deals with existence uncertainty by assessing the probability of a future event occurring or not occurring. The question arises, should this approach also be used for contingent assets or should an alternative approach be considered.
Alternatives considered .085 There are two main approaches to addressing existence uncertainty: (a) standardized threshold criteria; and (b) use of all available evidence to make neutral judgments about the elements existence. Under the first approach, determining whether an asset exists at the financial statement date depends on an assessment of the probability of a future event confirming that an asset existed or did not exist at the financial statement date. Such assessment requires the use of judgment by those responsible for preparing the financial statements. Clearly, when an asset has been received, there is no uncertainty about its existence. However, there can be situations where there is uncertainty as to whether the asset exists at the financial statement date. In these situations, the uncertainty may only be resolved by a future event occurring that will confirm either that the asset existed or it did not. Uncertainty relating to the occurrence
.086
.087
or non-occurrence of the future event(s) can be expressed by a range of probabilities or thresholds. The degrees of probability that a future event will occur are commonly described as: (a) likely, more likely than not, probable the probability of the occurrence (or non-occurrence) of the future event(s) is high; (b) unlikely, less likely than not, not probable, remote the probability of the occurrence (or non-occurrence) of the future event(s) is slight; and (c) not determinable the probability of the occurrence (or non-occurrence) of the future event(s) cannot be determined. .088 The advantage of this approach is that it uses understandable, general threshold criteria that act as filters, screening out items that have low or even remote likelihood of occurrence. The standardized threshold approach is currently used by other standard setters. 8 In its Conceptual Framework Exposure Draft 2, IPSASB considered whether, in dealing with existence uncertainty, a standardized threshold criteria should be adopted, or whether all available evidence should be used to make neutral judgments about an elements existence. IPSASB formed a view that while the adoption of thresholds for recognition purposes may produce information that is understandable, such an approach risks omitting information that is relevant and faithfully representative. This is because it disregards items that are below such thresholds, perhaps by very small margins, but which will in all other ways meet the definition of an element. Therefore, IPSASB concluded that, on balance, all available evidence should be assessed in determining whether an element exists. PSAB is of the view that both approaches require neutrality in judgment as to whether an asset exists at the financial statement date and both would produce results that meet the qualitative characteristics. However, the first approach is more pragmatic and simpler for users to apply. Providing basic guidance as to when those thresholds have been met would offer a more consistent basis for users than would the evidence-based approach.
.089
.090
Proposed guidance .091 The determination of whether an asset exists at the financial statement date depends on an assessment of the probability of a future event occurring, or not occurring, confirming that an asset existed at the financial statement date. This probability can be expressed by the following: (a) likely the probability of the occurrence (or non-occurrence) of the future event(s) is high; (b) unlikely the probability of the occurrence (or non-occurrence) of the future event(s) is slight; and
Other standard setters reviewed that address this topic include: AASB, AcSB, FASAB, FASB, GASB, IASB, IPSASB, NZ FRSB, SA ASB, UK ASB.
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(c)
not determinable the probability of the occurrence (or non-occurrence) of the future event(s) cannot be determined.
.092
Assessing the likelihood of the future confirming event occurring, including estimating its financial effects, is a matter for judgment by those responsible for preparing the financial statements. In identifying contingent assets and determining their amount, consideration would be given to all information available prior to completion of the financial statements, supplemented by experience in similar transactions and, in some cases, reports from independent experts.
DISCLOSURE VS RECOGNITION
.093 The existing guidance on contingent assets, as provided in FINANCIAL STATEMENT PRESENTATION, paragraph PS 1201.072, requires only disclosure of material contingent assets at the end of the accounting period. It does not provide any further guidance as to what should be disclosed. On the other hand, CONTINGENT LIABILITIES, Section PS 3300, requires recognition of contingent liabilities when it is likely that a future event will confirm that a liability has been incurred at the date of the financial statements. The question arises whether contingent assets should continue to be just disclosed or recognized similarly to contingent liabilities. When disclosure or recognition would be appropriate also needs to be addressed.
.094
Alternatives considered .095 In assessing the alternatives for reporting of contingent assets the following options have been considered: (a) disclosure; and (b) recognition. There is general support among standard setters to disclose contingent assets when the probability of the confirming future event occurring is high (probable, likely). 9 Contingent assets are not recognized as there is a concern that recognition of contingent assets would result in recognizing revenue that may never be realized. Standard setters that do not provide guidance on contingent assets do offer guidance for contingent gains. 10 That guidance also states that contingent gains shall not be recognized and requires disclosure of contingent gains when the occurrence of the future confirming event is high (likely) or when contingencies might result in a gain.
.096
.097
The standard setters reviewed that address this topic include: AASB, AcSB (Part I) IASB, IPSASB, NZ FRSB, PSAB, SA ASB, UK ASB. 10 The standard setters reviewed that address this topic include: AcSB (Part II) and FASB, GASB.
.098
Although some standard setters note that contingent assets should not be recognized, they state that: when realization of revenue is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. 11 Those same standard setters, unlike PSAB, note that contingent liabilities should not be recognized. However, they allow for recognition of a provision when an outflow of resources embodying economic benefits or service potential is probable (likely). Therefore, although those standard setters state that contingent assets and contingent liabilities should not be recognized, they effectively allow for recognition of contingent assets and contingent liabilities as assets and liabilities when certain criteria is met. Whether a contingent asset or contingent liability is recognized as an asset or liability or as a contingent asset or contingent liability, it still increases an asset or liability account and, thus, the impact on the financial statements is the same regardless of the approach taken. The function of financial statements is the communication of information to users. To fulfill this function effectively, the information must embody certain essential characteristics. These include reliability, relevance, comparability and understandability. For that reason, in arriving at the appropriate alternative for reporting of contingent assets, it is important to consider the qualitative characteristics that the information presented in the financial statements should have. According to FINANCIAL STATEMENT CONCEPTS, Section PS 1000, one of the traits of reliable information is conservatism. Conservatism conveys that when uncertainty exists, assets, revenue and gains should not be overstated, and liabilities, expenses and losses should not be understated. Practically, this has been interpreted to mean that a higher evidence level is required for an asset than for a liability in order for those elements to be recognized in the financial statements. However, conservatism does not encompass the deliberate understatement of assets and revenue, or the deliberate overstatement of liabilities and expenses.
FINANCIAL STATEMENT CONCEPTS, Section PS 1000, also provides that
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.100
.101
reliable information possesses the characteristic of neutrality. Information is neutral when it is free from bias that would lead users towards making decisions that are influenced by the way information is measured or presented. Requiring that contingent assets be disclosed while contingent liabilities are recognized may introduce bias into financial statements and, hence, lack neutrality. Such bias is contrary to the qualitative characteristic of representational faithfulness, which requires that transactions and events affecting the entity are presented in financial statements in a manner that is in agreement with the actual underlying transactions and events. Biased information, which does not faithfully represent the substance of the transaction or event, inhibits understanding, evaluation and
11
The standard setters reviewed that address this topic include: AASB, AcSB (Part I), IASB, IPSASB, NZ FRSB, SA ASB, UK ASB.
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decision-making by users and adversely affects the accountability provided by the financial statements to stakeholders. .102 Accordingly, there appears to be a recent movement by standard setters away from conservatism. Both IPSASB and the International Accounting Standards Board (IASB), in their work on their conceptual frameworks, provide that conservatism is incompatible with neutrality in that it introduces bias into the financial statements. As a result, IPSASB considers that prudence (conservatism) should not be a factor in determining threshold criteria for recognition. 12 Also, when the IASB revised its conceptual framework in September 2010, it replaced the concept of prudence by neutrality. Another important aspect to consider is the relevance of information provided in the financial statements. Information is relevant when it can influence the decisions of users by helping them evaluate the financial impact or potential financial impact of past, present or future transactions and events, or confirm or correct, previous evaluations. Decisions of users might be affected if amounts that are reported as assets did not materialize as expected. Alternatively, decisions might also be affected if a contingent asset was not recorded yet it resulted in an inflow of revenue. In addition to considering the qualitative characteristics of financial statement information, it is important to consider the general guidance in FINANCIAL STATEMENT CONCEPTS, Section PS 1000, which provides when recognition and disclosure is appropriate. According to the conceptual framework an item meeting the definition of an element and recognition criteria would be recognized in the financial statements. Otherwise disclosure of such information should be considered. Accordingly, an argument could be made that contingent assets should not be recognized as they do not meet the definition of assets and the general recognition criteria described in paragraph PS 1000.55. One aspect of the assets definition is control. In the case of contingent assets, there is uncertainty as to the existence of the asset. As a result, there is doubt whether control of the economic resource exists at the financial statement date. It is only the future event that will confirm that the entity had an asset and, therefore, it is only the future event that will confirm control of the economic resource at the financial statement date. Further, the recognition criteria provide that an item would only be recorded if it can be measured and when it is expected that future economic benefits will be obtained. The term expected is not intended to accommodate the recognition of items that do not meet the definition of one of the elements of financial statements. 13 From this perspective, where there is some uncertainty about existence of an asset at the financial statement date, contingent assets should only be disclosed.
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.105
12
IPSASBs December 2010 Consultation Paper, Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: Elements and Recognition in Financial Statements. 13 FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.56.
.106
On the other hand, it could be argued that in the case of contingent liabilities, we are also uncertain about incurrence of a liability at the financial statement date, and yet contingent liabilities are recognized when it is likely that the future event will confirm the incurrence of a liability. How is recognition of contingent liabilities that do not meet the definition of an element nor the general recognition criteria different from recognizing contingent assets? It would appear that both do not meet the definition of an element or the general recognition criteria. Also, both are characterized by the same existence uncertainty that will be resolved when a future event occurs or fails to occur. Conservatism was long considered one of the fundamental accounting concepts, determining the time for recognition. Hence, it appears to be the main contributing factor in the differential treatment of contingent liabilities and contingent assets. Practically speaking, conservatism entails taking a cautious view of assets, revenues, liabilities and expenses. As long as conservatism remains part of the conceptual framework, it will guide the accounting concepts. Another reason for treating contingent assets differently than contingent liabilities is the fact that recognition of contingent assets may be seen as being riskier to the long-term viability of the entity than the recognition of contingent liabilities. If a contingent liability is not incurred as expected, the viability of the entity is not compromised. However, if a contingent asset does not materialize, affordability of future services may be affected. In order to address the risk associated with the recognition of contingent assets, an argument could be made to recognize them when the probability of their realization is so high that there is little doubt as to the existence of an asset at the financial statement date. This approach may partially address the bias reflected in the recognition of contingent liabilities versus disclosure of contingent assets. On the other hand, it may be debated that if an item is so close to realization then there may not be much benefit in recognizing it a little earlier. Waiting until realization may produce more reliable results for decision-making and accountability purposes. In evaluating the appropriate alternative for reporting of contingent assets, it may also be useful to consider examples of contingent assets and the existing PSA Handbook guidance on the subject, if any. An argument for recognition of contingent assets may be found in CONTINGENT LIABILITIES, paragraph PS 3300.25. It states that in cases where contingent liability may be mitigated by a counterclaim or another claim against a third party, the amount of recovery would be taken into account, provided that the probability of recovery is likely. However, FINANCIAL STATEMENT PRESENTATION, paragraph PS 1201.072, notes that contingent assets should only be disclosed. Therefore, there is an inconsistency with the existing reporting of contingent assets. A contingent asset that is likely would be recognized if it reduces the amount accrued for a related contingent loss but in
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any other case recognition is not appropriate. Other standard setters also allow for recognition of a reimbursement but only when it is virtually certain that reimbursement will be received if the entity settles the obligation. 14 This treatment is consistent with those standard setters treatment of contingent assets, which provides that when the realization of revenue is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate. .112 A review of guidance relating to contingent recoveries in the former
GOVERNMENT TRANSFERS, Section PS 3410, provides some additional
considerations. It notes that contingent recoveries would be recognized as receivables when there is sufficient evidence that the recipient has not met necessary conditions and is required, under the terms of the transfer, to repay all or some of the amount originally transferred. Given the wording of has not met rather than will not meet and further guidance in this Section, recognition of contingent recovery is not allowed and only disclosure is appropriate when it is likely that the recipient will not meet the conditions related to a particular transfer. .113 However, a question remains if there could be circumstances under which recognition prior to the confirming future event would be appropriate. For example, if the condition of the grant is to build a bridge by April 10th and as of March 31st no activity had taken place, would that constitute sufficient evidence that the recipient will not meet the necessary conditions? A possible settlement from a lawsuit may also be an example of a contingent asset. The PSA Handbook does not provide specific guidance on this subject and, if following the existing general guidance, the contingent asset would be disclosed if material. However, it may be of value to consider if, under any circumstances, it would be appropriate to recognize such settlement before the outcome is known with certainty. For example, if after the financial statement date the defendant proposed an out-of-court settlement, the amount is known and a legal precedent supporting the position of the plaintiff exists, would recognition of such information be relevant and useful to the users of financial statements or would disclosure only be appropriate? In considering this example, it should be noted that the defendant may recognize a contingent liability on its financial statements, if following the PSA Handbook. For information in the financial statements to be useful in helping stakeholders in making assessments concerning a public sector entitys financial operations and management, such information must embody the essential qualitative characteristics. Recognition of contingent assets at some point earlier than realization could meet the qualitative characteristics while addressing the bias currently reflected in the disclosure of contingent assets as compared to recognition of contingent liabilities. Recognition may also produce results that
.114
.115
14
Other standard setters reviewed that address this topic include: AASB, AcSB (Part I), IASB, IPSASB, NZ FRSB, SA ASB, UK ASB.
are more consistent with those of other standard setters who provide that contingent assets are assets when realization of revenue is virtually certain. .116 However, PSAB is of the view that recognition of contingent assets could result in recognition of items as assets that do not meet the assets definition and, therefore, be contrary to the guidance in the conceptual framework. Also, of concern are the possible unintended consequences resulting from recognizing items that could be argued to fit the definition of a contingent asset but which otherwise would not meet the definition of an asset. This may open the door to manipulation of financial results in order to improve financial position of an entity. The risk of this behaviour is greater with recognition of contingent asset than with recognition of contingent liabilities as there may be an incentive to recognize contingent assets, whereas there is an inherent reluctance to recognize contingent liabilities. Given the recognition constraints of the existing conceptual framework and the concerns surrounding the recognition of contingent assets, PSAB is of the view that contingent assets should only be disclosed. This treatment still provides relevant and reliable information for accountability and decision-making purposes while addressing the risks associated with the recognition of contingent assets.
.117
DISCLOSURE
.118 The existing guidance on reporting of contingent assets included in FINANCIAL STATEMENT PRESENTATION, paragraph PS 1201.073, states that financial statements must provide information in notes or schedules to describe a government's material contingent assets. Such information helps users assess the economic resources that may be available. However, there is no guidance as to the type of information to be disclosed about a public sector entitys contingent assets. Other standard setters provide that where an inflow of economic benefits or service potential is probable, an entity should disclose a brief description of the nature of the contingent assets at the reporting date and, where practicable, an estimate of their financial effect. 15 Those standard setters also recognize the fact that in extremely rare cases, disclosure of some or all information may prejudice the position of the entity and, hence, such disclosure need not be provided. However, the general nature of the contingency and reasons for non-disclosure should be stated.
.119 .120
.121
15
Other standard setters reviewed that address this topic include: AASB, IASB, IPSASB, NZ FRSB, SA ASB, UK ASB.
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Proposed guidance .122 In assessing the public sector entity's financial position and results, it is important to understand its contingent assets. As a minimum, knowledge of the existence, nature and extent of contingent assets is warranted because they indicate the economic resources that may be available to the public sector entity. The relevance of such information to the decision-making process arguably outweighs the inherent uncertainty. Disclosure of the nature of contingent assets includes a description of the circumstances giving rise to the uncertainty and information about the anticipated resolution of the uncertainty. When a reasonable estimate can be made, disclosure of the extent of a contingent asset includes the public sector entity's best estimate and a range of possible amounts, unless it would have an adverse effect on the outcome. A financial statement user may not find disclosure of a broad range of amounts, which may extend from the minimum possible amount to the maximum possible amount, as useful as a narrower range that comprises what is reasonable. When an estimate of the amount has been made, the basis for that estimate would be disclosed. It may also be useful to disclose the significant assumptions underlying the contingent asset that are subject to change and the impact that a change would have on the estimate. Disclosure of the extent could also be accomplished by disclosing the minimum likely amount of the contingent asset, accompanied by an explanation of the significant factors that could affect the resolution of the contingent asset and the prospects that any contingent asset will be more than the minimum likely amount. The level of disclosure also considers the sensitivity of the information.
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.126
Principle 2 Except when covered by another Section, the existence of a contingent asset at the date of the financial statements should be disclosed in notes to the financial statements when the occurrence of the confirming future event is likely. Principle 3 The following information should be disclosed in notes or schedules relative to a contingent asset: (a) the nature; (b) the extent, except in those cases where the extent cannot be measured or disclosure of the extent would have an adverse effect on the outcome; (c) the reason(s) for any non-disclosure of the extent; and (d) when an estimate of the amount has been made, the basis for that estimate.
PART III CONTRACTUAL RIGHTS

.127 The PSA Handbook does not define or provide guidance on contractual rights. However, dictionary definitions and the definition and guidance on contractual obligations included in CONTRACTUAL OBLIGATIONS, Section PS 3390, have been used as a starting point in defining contractual rights and determining if and how contractual rights should be reported. PSAB also consulted other authoritative sources of generally accepted accounting principles. Other standard setters do not have specific standards on contractual rights. However, the importance of presenting information that will enhance an understanding of the economic resources available in the future to meet the public sector entitys obligations is apparent from the lease disclosure requirements by the lessor; and from the IPSASB Exposure Draft, Reporting on the Long-Term Sustainability of a Public Sector Entitys Finances. The lease disclosure requirements reviewed for an operating lease require the lessor to disclose the future minimum lease payments under a non-cancelable lease as well as a general description of the lessors significant leasing arrangements. 16 This disclosure provides the users of the financial statements with information on the resources available in the future and the nature of the contractual arrangements. The IPSASB Exposure Draft of Recommended Practice Guideline, Reporting on the Long-Term Sustainability of a Public Sector Entitys Finances, also emphasizes the importance of presenting projections of inflows and outflows and complementary information in order to assess the long-term sustainability of an entitys finances. Although this topic is much broader than that of contractual rights, it highlights the importance of providing users with information relating to future inflows of economic resources available to meet a public sector entitys future obligations. PSAB is of the view that providing information on contractual rights and the expected future inflows associated with those rights would enhance users understanding of the nature and extent of the economic resources available to meet the public sector entitys obligations or to finance its operations. Such information would: (a) supplement the information provided as part of the disclosure requirements for contractual obligations; (b) provide a balanced view of a public sector entitys future revenue and expenditures; and (c) enhance users understanding of the full nature and extent of its resources and affairs.
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.131
16
The operating leases disclosure requirements reviewed include those of FASB, GASB, IASB and IPSASB.
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DEFINING CONTRACTUAL RIGHTS

.132 In determining the definition of contractual rights, consideration was given as to which contractual rights should be within the scope of this Section. If an approach similar to that in CONTRACTUAL OBLIGATIONS, Section PS 3390, was taken, it would define contractual rights to include all those rights to economic resources arising from contracts or agreements that will become assets in the future when the terms of those contracts or agreements are met. Under this approach, all inflows of economic resources would be captured, whether they result in exchange of resources, such as the sale of a bus at the carrying value, or additional resources available to the entity, such as a contractual right to receive lease payments. Another alternative is to limit the definition of contractual rights to those rights that will become assets and will result in revenue when the terms of the contracts or agreements are met. This approach would capture only those rights that provide information about additional economic resources available in the future to finance operations or to meet the public sector entitys obligations. Under this approach, the sale of an item at the carrying value would not meet the definition of contractual rights as such a sale would not result in additional resources but merely in an exchange of one economic resource, such as cash, for another economic resource, such as equipment. Consideration was also given to a third approach whereby in addition to capturing those rights that will result in additional resources (the second approach), it could also include contractual rights to exchange economic resources that are unusual or non-recurring in nature. For example, the sale of a building that is unusual or non-recurring at the carrying value. It was thought, however, that this approach may be considered more complicated and yet not provide much additional relevant information. The usefulness of information to the users of financial statements was a key consideration when determining the appropriate approach to defining contractual rights. Contractual rights that result in assets when the terms of the contracts or agreement are met would capture a broad array of contractual rights and may result in excessive disclosure of information that is not useful or relevant to users. It may also result in duplication of disclosures if already captured in accordance with the requirements of CONTRACTUAL OBLIGATIONS, Section PS 3390. Limiting the definition of contractual rights to those that will become assets and will result in revenue provides a practical limit on the types of contractual rights included yet results in provision of relevant information about additional economic resources available in the future to finance operations or to meet the public sector entitys obligations. This approach would supplement the information provided as part of the disclosure of contractual obligations and,
.133
.134
.135
.136
hence, provide a balanced view of a public sector entitys future revenue and expenditures. Proposed guidance .137 By definition a contractual right is a right to economic resources that arises out of a contract where a contract is a binding agreement between two or more parties that has clear economic consequences and is enforceable by law. Contractual rights may include, but are not limited to, contractual rights to receive payments under a shared cost agreement or contractual rights to receive lease payments. For the purposes of this Statement of Principles, contractual rights are limited to those contractual rights to assets and revenue arising from legally enforceable contracts or agreements that will become assets and will result in revenue of a public sector entity in the future when the terms of those contracts or agreements are met. Contractual rights are distinct from assets as there has been no past transaction or event giving rise to an asset and revenue at the financial statement date. Until a transaction or event occurs under a contract, a public sector entity only has a contractual right, and does not have an asset and revenue. In some cases, a transaction or event may give rise to an asset and revenue at the same time. In other cases, such as a prepaid lease, a transaction or event may give rise to a recognized asset, but the transaction or event giving rise to revenue has not yet occurred. In this case, a contractual right to future revenue remains. Contractual rights are governed by contract law and are distinct from certain public sector entity rights, such as the right to tax or the right to license. Such rights are derived from legislation based on constitutional authority or delegated constitutional authority. Contractual rights are distinct from contingent assets as there is no uncertainty related to the existence of the contractual right. Once the terms of the contract or agreement are met the contractual right will give rise to an asset and revenue.
FINANCIAL INSTRUMENTS, Section PS 3450, establishes standards on how to
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account for and report all types of financial instruments including derivatives. Paragraph PS 3450.011 requires recognition of financial instruments when the public sector entity becomes a party to the contractual provisions of the instrument. As a consequence, a public sector entity recognizes all of its contractual rights and obligations under derivatives on its statement of financial position as assets and liabilities on the commitment date, rather than on the date on which settlement takes place. Derivatives are existing assets and liabilities, unlike contractual rights covered by this Statement of Principles.
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Proposed definition Contractual rights are rights to assets and revenue arising from legally enforceable contracts or agreements that will, when the terms of those contracts or agreements are met, become assets and revenue in either the same period or different periods.
REPORTING OF CONTRACTUAL RIGHTS

Alternatives considered .143 Three alternatives have been considered with regard to the reporting of contractual rights. Recognition aside, as contractual rights are not assets and, therefore, should not be recognized, the alternatives are: (a) to disclose information about contractual rights; (b) not to disclose; or (c) to provide an option to disclose. Disclosure of information about a public sector entitys contractual rights is useful because it gives an understanding of the economic resources available in the future to meet the public sector entitys obligations or to finance future operations. Although other standard setters do not have standards or guidance on contractual rights, it is apparent from standards and proposed standards (on leases and reporting of the long-term sustainability of a public sector entitys finances), which require disclosure of information relating to expected future inflows of revenue, that such information is valuable to the users of financial statements.
FINANCIAL STATEMENT OBJECTIVES, Section PS 1100, highlights the
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importance of providing information that reports the extent of the financial obligations that will have to be settled, or the extent of the assets that are available for future operations. Such information is useful because it bears directly on future revenue requirements and on a government's ability to settle its obligations and finance its operations. Although this Section specifically addresses assets that are presently available for future operations, information on economic resources available in the future once the terms of the contract are met may be equally important. .146
CONTRACTUAL OBLIGATIONS, Section PS 3390, requires disclosure of
significant contractual obligations in order to provide users with information on expected future liabilities. This includes a description of the nature, extent and timing of the related expenditures. Information on expected future inflows is no less important as it provides information on resources available in the future to meet the public sector entitys liabilities, contingent liabilities and contractual obligations, or to finance future operations. Providing information on both future inflows and outflows provides a balanced view of a public sector entitys future revenue and expenditures, and enhances users understanding of the nature and extent of its financial resources and affairs.
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It could be argued that since no other standard setter provides a standard on contractual rights or has a project underway dealing with this matter, that disclosure of such information may have been thought not to be important or not important enough to create a standard or guidance. Further, since determining which contractual rights of a public sector entity should be included in the financial statements may be burdensome, it might be best not to disclose such information at all. Optional disclosure of contractual rights was also considered. Although, this approach would provide for flexibility, it would also lead to inconsistencies in reporting of information across public sector entities and, hence, result in lack of comparability of information. Given the above arguments, and since the goal is to improve public sector entity financial statements and enhance their comparability, including a disclosure standard on contractual rights was thought to be the most appropriate alternative. A disclosure standard on contractual rights will complement the disclosure standard on contractual obligations and, therefore, provide a balanced view of a public sector entitys future revenue and expenditures. In determining the disclosure requirements for contractual rights, consideration was given to other Sections of the PSA Handbook that may require disclosure of information that would also be captured when applying the requirements of this proposed Section. Accordingly, in order to avoid duplication of disclosure, the Section on contractual rights would require disclosure of information about a public sector entitys contractual rights, except when covered by another Section of the PSA Handbook.
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DISCLOSURE
Proposed guidance .151 Disclosure of a public sector entitys contractual rights is useful because it provides an understanding of the economic resources available in the future to meet the public sector entitys obligations or to finance future operations. Contractual rights continue to be disclosed until both contractual rights to assets and to revenue no longer exist.
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Principle 4 Except when covered by another Section, information about a public sector entity's contractual rights should be disclosed in notes or schedules to the financial statements and should include descriptions about their nature and extent and the timing.
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APPENDIX A DECISION TREE ECONOMIC RESOURCES
Outside scope
No
Is there an economic resource from which future economic benefits are expected to be obtained? Yes Do you control the economic resource as a result of a past transaction or event? No Contractual right (PS XXXX) Yes Asset (PS XXXX)
Uncertain Do nothing No Is there an existing condition or situation that is unresolved? Yes Contingent asset (PS XXXX) No
No
Is the confirming event likely to occur? Yes Disclose Disclose
Have the recognition criteria been met?
No Disclose
Yes Accrue
APPENDIX B OTHER PROPOSALS

The following provides potential amendments to existing standards that could arise from the acceptance of the proposals on assets, contingent assets and contractual rights.
Part I Assets
FINANCIAL STATEMENT CONCEPTS, Section PS 1000 .001 The proposed guidance on assets suggests improvements to FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.36. As a result of the proposed changes described in Part I, the improvements are: (a) the addition of the word economic in front of the word benefit in paragraph PS 1000.36(a) in order to ensure internal consistency with the definition of assets; (b) replacement of the term flows with inflows to better represent that future economic benefits are inflowing rather than just flowing which could imply an outflow; (c) enhancement of the description of future economic benefits by adding that they also entail a capacity to reduce cash outflows; (d) replacement of the term government with the term public sector entity to capture governments and those government organizations applying the PSA Handbook; and (e) modifying the guidance on control of an asset to capture both the control of the economic resource and access to the future economic benefits as explained in the Section on Control. This would result in the following improvements to FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.36: Assets have three essential characteristics: (a) they embody a future economic benefits that involves a capacity, singly or in combination with other assets, to provide future net cash flows, or to provide goods and services, to provide future net cash inflows, or to reduce cash outflows; (b) the public sector entity government can control the economic resource and access to the future economic benefits; and (c) the transaction or event giving rise to the public sector entitys government's control of the benefit has already occurred. .003
FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.37, indicates when an
.002
item is not an asset: An item is not an asset of a government if it lacks one or more of the essential characteristics listed in the preceding paragraph. Thus, for example, an item does not qualify as an asset of a government if the item involves: (a) no future economic benefit;
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(b) (c)
future economic benefit, but the government cannot obtain it; or future economic benefit that the government may obtain, but the events or circumstances that give the government control of the benefit have not yet occurred.
.004
As FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.36, already stipulates the essential characteristics of assets, the guidance in paragraph PS 1000.37 does not add value and its deletion is recommended.
FINANCIAL STATEMENT CONCEPTS, paragraph PS 1000.38, provides guidance
.005
on control of an asset: For an asset to be a government's asset, that government must control the future economic benefit associated with the asset to the extent that it can benefit directly from the asset and generally can deny or regulate access to that benefit by others. For example, the direct benefits of education and health care programs accrue to and are controlled by the individuals who are educated or treated and healed. Therefore, the costs of such programs, which are often called "investments", are excluded from being assets of the government. .006 Deletion of paragraph PS 1000.38 is recommended as the proposed guidance on control of an asset is expected to replace the existing guidance.
FINANCIAL STATEMENT OBJECTIVES, Section PS 1100 .007 FINANCIAL STATEMENT OBJECTIVES, paragraph PS 1100.22, provides a definition of economic resources: Economic resources are scarce means that are useful for carrying out economic activities, such as consumption, production and exchange. Financial and non-financial resources comprise the economic resources of a government. .008 Deletion of paragraph PS 1100.22 is recommended as the proposed guidance on economic resources is expected to replace the existing guidance.
Part II Contingent Assets

FINANCIAL STATEMENT PRESENTATION, Section PS 1201 .009
FINANCIAL STATEMENT PRESENTATION, paragraphs PS 1201.071-.074,
provide guidance on contingencies and contingent assets: Contingencies .071 Contingencies are the result of existing conditions or situations involving uncertainty that will ultimately be resolved when one or more future events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of an asset, the reduction of a liability, the loss or
impairment of an asset, or the incurrence of a liability. Contingencies result from such matters as pending or threatened litigation, guarantees of the indebtedness of others, indemnities, and provisions related to insurance programs. They also include grants or contributions that are recoverable if certain future events occur or fail to occur. (See CONTINGENT LIABILITIES, Section PS 3300, for standards on accounting for and disclosing contingent liabilities.) .072 Financial statements should disclose information to describe a government's material contingent assets at the end of the accounting period. Financial statements must provide information in notes or schedules to describe a government's material contingent assets. Such information helps users assess the economic resources that may be required or available. In the preparation of financial statements, estimates are required for many ongoing and recurring activities. The mere fact that an estimate is involved, however, does not of itself constitute the type of uncertainty that characterizes a contingent asset.
.073
.074
.010
It is recommended that FINANCIAL STATEMENT PRESENTATION, paragraph PS 1201.071, include a reference to the proposed contingent assets Section. As well, deletion of paragraphs PS 1201.072-.074 is recommended as the proposed guidance on contingent assets is expected to replace this guidance.
Part III Contractual Rights

FINANCIAL STATEMENT PRESENTATION, Section PS 1201 .011
FINANCIAL STATEMENT PRESENTATION, paragraph PS 1201.070, provides a definition of contractual obligations and a reference to the CONTRACTUAL OBLIGATIONS, Section PS 3390. A similar paragraph for contractual rights is
recommended: Contractual rights Contractual rights are rights to assets and revenue arising from legally enforceable contracts or agreements that will, when the terms of those contracts or agreements are met, become assets and revenue in either the same period or different periods (see CONTRACTUAL RIGHTS, Section PS XXXX).
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CONTRACTUAL OBGLIATIONS, Section PS 3390 .012 In determining when contractual rights should be disclosed, PSAB considered the disclosure requirements in CONTRACTUAL OBLIGATIONS, Section PS 3390. Contractual obligations are disclosed if they are significant. Given that the PSA Handbook does not define the term significance but rather defines and applies the term materiality, it is thought that in the case of contractual rights and contractual obligations, materiality should also be applied in determining when items would be disclosed. As general guidance on materiality already exists in the PSA Handbook, there is no need to repeat, in specific Handbook Sections, that only material items should be disclosed. The following improvement is recommended in CONTRACTUAL OBLIGATIONS, paragraph PS 3390.09: Information about a government's contractual obligations that are significant in relation to the current financial position or future operations should be disclosed in notes or schedules to the financial statements and should include descriptions of their nature and extent and the timing of the related expenditures.
.013
APPENDIX C ABBREVIATIONS AND ACRONYMS

AASB AcSB FASAB FASB GASB IASB IPSASB NZ FRSB SA ASB UK ASB Australian Accounting Standards Board Accounting Standards Board (Canada) Federal Accounting Standards Advisory Board (U.S.) Financial Accounting Standards Board (U.S.) Governmental Accounting Standards Board (U.S.) International Accounting Standards Board International Public Sector Accounting Standards Board Financial Reporting Standards Board (New Zealand) Accounting Standards Board (South Africa) Accounting Standards Board (United Kingdom)
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2013-11 Assets, Contingent Assets, Contractual Rights

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Statement of Principles

Assets, Contingent Assets and Contractual Rights

Commenting on this Statement of Principles

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

ii | STATEMENT OF PRINCIPLES AUGUST 2013

Assets, Contingent Assets and Contractual Rights

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

PURPOSE AND SCOPE

THE NEED FOR A STANDARD

2 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

4 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

6 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

8 | STATEMENT OF PRINCIPLES AUGUST 2013

PAST TRANSACTIONS OR EVENTS

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

FUTURE ECONOMIC BENEFITS

10 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

12 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

PART II CONTINGENT ASSETS

14 | STATEMENT OF PRINCIPLES AUGUST 2013

CHARACTERISTICS OF CONTINGENT ASSETS

Existing condition or situation

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

Confirming future event

16 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

18 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

20 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

22 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

24 | STATEMENT OF PRINCIPLES AUGUST 2013

PART III CONTRACTUAL RIGHTS

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

DEFINING CONTRACTUAL RIGHTS

26 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

REPORTING OF CONTRACTUAL RIGHTS

28 | STATEMENT OF PRINCIPLES AUGUST 2013

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

APPENDIX A DECISION TREE ECONOMIC RESOURCES

Is the confirming event likely to occur? Yes Disclose Disclose

Have the recognition criteria been met?

30 | STATEMENT OF PRINCIPLES AUGUST 2013

APPENDIX B OTHER PROPOSALS

Part II Contingent Assets

32 | STATEMENT OF PRINCIPLES AUGUST 2013

Part III Contractual Rights

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

34 | STATEMENT OF PRINCIPLES AUGUST 2013

APPENDIX C ABBREVIATIONS AND ACRONYMS

ASSETS, CONTINGENT ASSETS AND CONTRACTUAL RIGHTS

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