What do you need to know about the proposed IPSAS?

An overview of the proposed IPSAS on measurement

The IPSASB is proposing new requirements for the measurement of assets and liabilities in the public sector in ED 77 on Measurement.

ED 77 was issued as part of package of documents dealing with inter-related issues. This package includes:

• ED 76 on Conceptual Framework Update: Chapter 7, Measurement of Assets and Liabilities in Financial Statements (published locally as ED 188);
• ED 78 on Revisions to IPSAS 17 on Property, Plant and Equipment (published locally as ED 190); and
• ED 79 on Non-current Assets Held for Sale and Discontinued Operations (published locally as ED 191).

What do you need to know about the proposed IPSAS?

ED 77 is a proposed IPSAS that deals with initial measurement and subsequent measurement requirements for the four measurement bases proposed in ED 76.

When to apply the proposed IPSAS?

ED 77 is applied when another IPSAS requires or permits the use of one or more of the measurement bases. The objective of ED 77 is to:

• define measurement bases that assist in reflecting the cost of services, operational capacity and financial capacity of assets and liabilities; and
• identify approaches under those measurement bases to be applied through individual IPSAS to achieve the objectives of financial reporting.

This objective is aligned with the measurement objective in the Conceptual Framework which 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.

What are the initial measurement requirements?

Items are measured initially at transaction price, unless:

• transaction price does not faithfully represent the asset or liability; or
• required or permitted by another IPSAS.

The transaction price is the price paid to acquire an asset or received to assume a liability. In an orderly market, the transaction price would reflect the initial value of the asset or liability negotiated between market participants at the measurement date under current market conditions. ED 77 allows assets and liabilities that are not undertaken in orderly markets to be measured initially at the deemed cost when it is not appropriate to use their transaction price. This could be when the transaction price is not observable or when the transaction price is known but does not faithfully represent the asset or liability. Examples could include, the acquisition of assets at no or nominal cost or when the information about the transaction price may not be available upon adoption of IPSAS.

The deemed cost is determined by estimating the value of the asset or liability using one of the current value measurement techniques at the transaction date. There are three measurement techniques identified in ED 77 – market approach, cost approach and income approach that can be used to estimate the deemed cost.

• Market approach – Uses prices and other relevant information generated by market transactions involving similar assets or liabilities.
• Cost approach – Reflects the amount that would be required currently to replace the service provided by an asset (i.e. current replacement cost) through the acquisition of a substitute asset of comparable utility, adjusted for obsolescence.
• Income approach – Converts future amounts to a single current (discounted) amount.

Following initial measurement, the measurement hierarchy is applied to determine the appropriate measurement model for the assets and liabilities. This is discussed below.

What are the subsequent measurement requirements?

An accounting policy choice is often outlined in IPSAS for the subsequent measurement of an asset or liability at its historical cost or current value:

• Under the historical cost model, assets and liabilities are measured at their historical cost.
• Under the current value model, assets are measured at fair value or current operational value; and liabilities are measured at fair value or the cost of fulfilment.

The IPSASB defines these four measurement bases as follows.

Table 1: Definitions of the current value measurement bases

What is the difference between fair value and current operational value?

The IPSASB is of the view that it is appropriate to use fair value when the assets are held, or liabilities are incurred, primarily for their financial capacity. When assets are held for service delivery i.e. operational capacity, rather than to generate economic benefits or being sold, then the current operational value should be used instead of fair value.

To illustrate, if an entity has investment property which is held to generate rental or for capital appreciation, the asset is held for its financial capacity. In this case, fair value may be an appropriate measurement basis. In contrast, if an entity has property, plant and equipment which is held to deliver services or for administrative purposes, the asset is held for operational capacity. In that instance, the current operational value is appropriate.

Therefore, the choice between the current value measurement bases will depend on the primary measurement objective of each asset or liability.

Table 2: High level differences between fair value and current operational value

What is next?

The proposals in the package of EDs and potential implications and issues will be explored further by the Secretariat with stakeholders in coming months. Upcoming activities to look out for include:

• A series of recordings will be made available on the ASB’s website.
• Education sessions and roundtable discussions will be held with stakeholders.
• Newsletter articles and social media posts will explore the EDs further.

ED 76 to ED 79 (locally published as ED 188 to ED 191) are available on the ASB’s website and can be accessed here: https://www.asb.co.za/comment-on-proposals/.

Comment can be submitted to the Secretariat of the ASB at info@asb.co.za, by 1 October 2021.