What to expect in new IPSAS proposals: measurement of assets

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

The new Standard will apply when another IPSAS sets out measurement requirements with reference to one or more of the measurement bases i.e., historical cost, fair value, current operational value and cost of fulfillment. ED 77 provides detailed guidance on the application of these measurement bases.

The existing IPSAS require entities to make an accounting policy choice for the subsequent measurement of assets using the cost model or revaluation (or fair value) model. As a consequence of ED 77, IPSAS will require entities to choose whether to apply the “historical cost model” or “current value model”. Under the current value model, entities may measure assets at fair value or current operational value.

The IPSASB concluded that the selection of the current value measurement basis should be based on the primary measurement objective for holding the assets. For example, are assets generally held for their operational capacity or financial capacity? This means that the appropriate current value measurement basis will depend on whether an entity holds its assets primarily for service delivery or to generate cashflows. Assets held for service delivery should be measured at the current operational value, while those held to generate cashflows are measured at fair value.

The IPSASB has applied this principle from ED 77 to the existing measurement requirements in other IPSAS, and decided that the current operational value should be used as an alternative to fair value when measuring property, plant and equipment held for operational capacity. The IPSASB believes that other types of assets (i.e. intangible assets, investment property, biological assets etc.) are generally held for their financial capacity in which case fair value continues to be an appropriate measurement basis. It is for this reason that the IPSASB has not proposed adding the current operational value to IPSASs dealing with inventories, intangible assets, investment property, biological assets.

Once an entity has decided which basis it will apply, it should then consider which of the three measurement techniques (i.e. market approach, cost approach and income approach) it will apply to estimate the value of the asset. The IPSASB did not develop a hierarchy for the selection of measurement techniques. The IPSASB believes that such a selection should be straightforward as entities will be guided by what information is available to them when measuring the asset. To illustrate, if there is an active market for an identical asset, then the market approach is appropriate. However, when the asset being measured is specialised, it is unlikely that there would be an active market, and a cost approach or income approach would be more appropriate. When assets are used for service delivery rather to generate cash flows, there may be challenges with using the income approach especially when the cash flows are nominal.

The impact of the new measurement approach will be seen in entities with property, plant and equipment held for operational capacity that revalued their assets, and those with specialised property, plant and equipment that used the depreciated replacement cost to estimate fair value. These entities would be required to measure their assets at the current operational value which may vary based on the considerations and measurement assumptions required for that basis. Entities that hold assets for financial capacity, may not be impacted as much as they would have already used market-based evidence when revaluing their assets.

Have your say…

The Board will need to consider whether these changes are needed to the Standards of GRAP. As a result, stakeholder feedback is critical in (a) commenting to the IPSASB on local experiences, and (b) informing the Board’s future work in this area.

What are your views on these proposals?

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

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).

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/.

Disclaimer

This content has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved or otherwise acted on by the Board.