IPSASB progresses revised measurement principles

The IPSASB approved measurement amendments to their Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities at the December 2022 meeting. The amendments conclude ED 76 on Conceptual Framework Update: Chapter 7, Measurement of Assets and Liabilities in Financial Statements, which was issued as part of a measurement suite of EDs in 2021. The IPSASB expects to approve the related IPSAS on Measurement at the March 2023 meeting.

Guidance on deemed cost clarified

The key discussion on measurement at the December 2022 meeting was the proposed guidance on deemed cost. The discussion considered how deemed cost should be defined, when it should be used, and where the guidance should be provided. The following preliminary decisions were taken, subject to further review of the guidance at the February 2023 check-in meeting.

How should deemed cost be defined?

Deemed cost is a concept that was previously used in specific circumstances in IPSAS when an entity was unable to apply the initial measurement requirements prescribed in an IPSAS, and often refers to fair value. For example, an item of property, plant an equipment acquired for zero or nominal consideration does not have a cost at which it can initially be measured as required by IPSAS 17 on Property, Plant and Equipment. IPSAS 17 prescribes that fair value should be used to initially measure these assets. Deemed is also used on initial adoption of IPSAS and is defined in IPSAS 33 on First-time Adoption of Accrual Basis IPSASs.

The measurement project updates “fair value” in the IPSASB’s Conceptual Framework and IPSAS on Measurement to align with IFRS 13 on Fair Value Measurement. The project further introduces a new public sector current value measurement basis for assets – current operational value (COV). Fair value will be used when assets are held for financial capacity, while COV will be used when assets are held for operational capacity.

The IPSASB considered whether deemed cost should refer to fair value, or be expanded to include other measurement bases. It was agreed that there may be circumstances where a deemed cost needs to be determined for an asset held for operational capacity, therefore COV should be included. The IPSASB will also consider whether there are circumstances where historical cost should be used as deemed cost instead of a current value.

The preliminary decision is that deemed cost will be defined as a surrogate for transaction price (plus transaction cost) at the measurement date. The new definition will replace the existing definition of deemed cost in IPSAS 33.

When should deemed cost be used?

The measurement project established the initial measurement principle as assets should be recognised at “transaction cost plus transaction price”. There are however certain circumstances in which a deemed cost may need to be used, such as when information needed to apply the initial measurement principle is unavailable, or where the initial measurement principle will not result in reliable and faithfully representative information. The circumstances will be re-considered in finalising the guidance.

Where will the guidance on deemed cost be provided?

The IPSASB previously agreed that the measurement principles are provided in the IPSAS on Measurement. Other IPSAS will describe how the measurement principles apply to specific transactions or events. The IPSASB agreed that this approach should also be applied to the guidance on deemed cost.

What is next on measurement?

The IPSASB will consider last amendments to the IPSAS on Measurement, mostly to reflect the decisions on deemed cost and for consistency with the Conceptual Framework, at the February check-in and March 2023 meetings.

The IPSASB agreed that a next phase of the measurement project should be undertaken after March 2023. This phase will evaluate the applicability of COV to other IPSAS not yet explicitly considered in the project. The objective would be to identify whether any changes are needed to these other IPSAS as a result of COV, for example, to add COV as a measurement basis option.

Follow the IPSASB’s progress on their website.

Does the approval of changes to the IPSASB’s Conceptual Framework impact local guidance?

The approval of changes to the IPSASB’s Conceptual Framework does not change anything in the Standards of GRAP.

The Accounting Standards Board agreed that a project on measurement is part of the 2024 to 2026 work programme, where changes made to IPSAS from the measurement project will be considered with stakeholders locally for the Standards of GRAP.