IPSASB-International developments on measuring assets and liabilities in the public sector

International developments on measuring assets and liabilities in the public sector

The measurement of assets and liabilities in the public sector is complex. This is because assets are used primarily to deliver services, and liabilities largely reflect transfers where no value is received in return. This means that measurement bases commonly used in accounting – particularly in the private sector – may not always be suitable.

The IPSASB issued a Consultation Paper on Measurement in 2019 outlining proposed approaches and guidance on measuring assets and liabilities. Key proposals included providing guidance on how to determine “fair value” and “depreciated replacement cost” when either measurement basis is required or allowed in an IPSAS.

The proposed guidance on fair value was based on IFRS 13 on Fair Value Measurement. Fair value in IFRS 13 is determined using three possible approaches, i.e. the market approach, the income approach and the cost approach. The cost approach uses replacement cost and is applied to the measurement of non-monetary assets.

In the Consultation Paper, the IPSASB introduced guidance on how to determine replacement cost, but as a measurement basis separate from any calculation of fair value. This was in part because replacement cost is identified as a measurement basis on its own in the IPSASB’s Conceptual Framework (add link: https://www.ipsasb.org/publications/conceptual-framework-general-purpose-financial-reporting-public-sector-entities-3).

Respondents to the Consultation Paper raised questions about how replacement cost could be used to determine fair value, but also as a measurement basis on its own. Respondents also noted that fair value is not specifically described as a measurement basis in the Conceptual Framework. To respond to these issues, the IPSASB agreed to review the Conceptual Framework. Proposals to review the Conceptual Framework and to progress the proposals on the Measurement project, will be considered together.

An initial discussion on the review of the Conceptual Framework was held at the IPSASB’s June 2020 meeting. An important outcome of the discussion was to indicate how the IPSASB sees measurement models, measurement bases, and measurement techniques. The diagram below illustrates this potential interaction.

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If the IPSASB retains the three approaches to measure fair value, then the IPSASB will need to deliberate how cost approach and replacement cost interact. How replacement cost and fulfilment value (or cost of fulfilment) will be defined will also need to be discussed. The IPSASB will consider issues related to value-in-use and cost of release at the September meeting. As the IPSASB progresses its discussions, this diagram may change.

A key consideration will be how this diagram is used to guide the IPSASB’s decisions on the measurement of specific types of assets and liabilities. The Conceptual Framework explains that the measure of assets and liabilities should be used to reflect:

• financial capacity – the capacity of an entity to fund its activities;
• operational capacity – the capacity of an entity to support the provision of services in future periods through physical and other resources; or
• cost of services – either measured in historical or current terms.

As an example, if an entity has investment property which is held to generate rental or for capital appreciation, the asset is likely held for its financial capacity. Using fair value may be an appropriate measure. In contrast, if an entity has property, plant and equipment which is held to deliver services or for administrative purposes, the asset is likely held for operational capacity. Using replacement cost may best reflect the value of the asset. A key consideration for measuring property, plant and equipment would be how the entity wants to measure the cost of services – which for assets is typically done through depreciation. A secondary decision could therefore be whether using a cost or a current value is appropriate.

The IPSASB will also discuss how their proposals link to the objectives of measurement at the next meeting.

Follow the debate on changes to the Conceptual Framework: https://www.ipsasb.org/consultations-projects/limited-scope-update-conceptual-framework and Measurement: https://www.ipsasb.org/consultations-projects/measurement.