IPSASB discusses guidance on accounting for infrastructure assets

The IPSASB has been through a process of identifying issues on infrastructure assets to determine the areas where additional guidance may be needed. The proposed guidance will be included in IPSAS 17, together with proposed guidance on heritage assets.

What issues has the IPSASB considered to date?

Refer to a previous article on the areas where guidance was considered in the first half of 2020.

At the September 2020 meeting, the IPSASB considered whether guidance should be provided in the following areas:

What decisions has the IPSASB taken?

Capitalisation thresholds

IPSAS 17 establishes the recognition principle for capitalising or expensing costs. The cost of an item of property, plant, and equipment shall be recognised as an asset if:

• it is probable that future economic benefits or service potential associated with the item will flow to the entity; and
• the cost or fair value of the item can be measured reliably.

In practice, entities expense certain assets that meet this recognition principle because they are below a “capitalisation threshold”. A capitalisation threshold determines whether assets should be capitalised and included in the statement of financial position (amounts above the threshold) or expensed (amounts below the threshold).

The IPSASB noted that this issue is generally considered to be a practical issue that is best addressed by entities considering their specific asset holdings and applying materiality. The IPSASB concluded that sufficient authoritative guidance exists in IPSAS 17. Non-authoritative Implementation Guidance will be added to IPSAS 17 that highlights materiality as the main driver for this consideration.

Separately accounting for, and valuing land under or over, infrastructure assets

IPSAS 17 currently provides clear guidance on the following:

• Land and buildings are separable assets and are separately accounted for and valued even if they are acquired together.
• Land, buildings, roads and electricity transmission networks are examples of separate classes of property, plant, and equipment that should be separately disclosed.

The IPSASB decided that no additional authoritative guidance is necessary in IPSAS 17, but that non-authoritative Implementation Guidance will be added. The Implementation Guidance will clarify the existing principles related to the valuation of land under or over infrastructure assets, specifically where an entity has chosen a current value model for subsequent measurement. The IPSASB considered the valuation of specialised infrastructure assets on land that do not have directly observable market values, and the impact this could have on the valuation of land. The IPSASB concluded that entities would need to consider the nature of the land. As examples, if a road runs through agricultural land, the value of the land under the road will reflect its agricultural nature; and if a road runs through an industrial area, the value of the land under the road will reflect its industrial nature.

Componentisation – identifying parts of infrastructure assets that should be separately depreciated

Entities find it difficult to apply materiality when identifying the individual components that should be separately recognised and depreciated.

The IPSASB decided to amend an example in IPSAS 17 from “…depreciating separately the pavements, formation, curbs and channels, footpaths, bridges, and lighting within a road system…” to “…depreciating separately the substructure and the surface of a road”. The Basis for Conclusions will explain that entities could continue to componentise assets to the more detailed level as described in the current example but could also apply a less detailed approach.

Implementation Guidance will be added with indicators for identifying significant parts of an item of property, plant, and equipment. The guidance will highlight the need to consider the facts and circumstances of transactions taken as a whole, and the role of materiality to determine the significant parts.

Not carrying out scheduled maintenance of assets

Infrastructure assets require constant maintenance and replacement of their components to operate effectively. Not carrying out scheduled maintenance of infrastructure assets reduces their service potential or their useful lives.

The IPSASB agreed that not carrying out scheduled maintenance of assets is a management issue and that the consequences may impact on the measurement of infrastructure assets. Implementation Guidance will be considered at a future meeting to explain how not carrying out scheduled maintenance could impact on e.g. measurement as an indicator for impairment or that the useful life of the asset has changed.

What are the timelines for the IPSASB’s project?

According to the IPSASB’s current work programme, proposed amendments to IPSAS 17 are due to be approved in December 2020.

Stay informed

As part of the Accounting Standards Board’s ongoing commitment to influence the international standard setting process, the proposed guidance on infrastructure assets will be issued concurrently for discussion locally. If you are interested in these developments, subscribe to the ASB’s newsletter to receive further updates, or follow the IPSASB’s project page by following this link.

The views expressed in this article are those of Secretariat and not the ASB Board.