IPSASB revisits measurement concepts in its Conceptual Framework

The IPSASB is revising its measurement concepts in the Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities (the Conceptual Framework) as a result of the measurement project that proposes new requirements for the measurement of assets and liabilities.

ED 76 on Conceptual Framework Update: Chapter 7, Measurement of Assets and Liabilities in Financial Statements is an update to the concepts in the Conceptual Framework underpinning the measurement of assets and liabilities. The update is necessary to address the misalignment between the existing concepts in the Conceptual Framework and the measurement requirements proposed by the IPSASB in ED 77 on Measurement.

ED 76 and ED 77 were issued as part of package of documents dealing with inter-related issues. This package includes:

• 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 changes is the IPSASB proposing?

Chapter 7 of the Conceptual Framework outlines the measurement concepts that guide the IPSASB in the selection of measurement bases for IPSAS and by preparers of financial statements in selecting measurement bases for assets and liabilities where there are no requirements in IPSAS.

Measurement hierarchy

ED 76 introduces a measurement hierarchy which identifies three levels for subsequent measurement by illustrating how different components of measurement interact. These three measurement levels are described as:

• Measurement Models – Approaches to present assets or liabilities.
• Measurement Bases – Methods to present relevant and faithfully representative information under the measurement model selected.
• Measurement Techniques – Methods to estimate the amount at which an asset or liability is presented under the selected measurement basis.

These levels are illustrated below.

Figure 1 – Subsequent measurement hierarchy

Measurement bases

ED 77 proposes definitions for four measurement bases and provides separate appendices that include guidance on how the bases are applied in practice.

Currently, the Conceptual Framework identifies eight measurement bases. For consistency with ED 77,  ED 76 describes four measurement bases and evaluates the information they provide in achieving the measurement objective. The IPSASB proposes removing the remaining measurement bases that will not be used in ED 77.

Table 1: Existing and proposed measurement bases

Fair value

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

The IPSASB introduces fair value to replace market value. This is based on stakeholders’ feedback that the IPSASB should include fair value as a measurement basis in the Conceptual Framework that is aligned with the IASB’s fair value measurement requirements in IFRS 13^®. ED 76 explains that fair value is appropriate when assets are held primarily to generate economic benefits or with a view to be sold.

Current operational value

Current operational value is defined as “the value of an asset used to achieve the entity’s service delivery objectives at the measurement date.”

The IPSASB introduces current operational value as a public sector specific current value measurement basis for assets, as an alternative to measuring assets when fair value is not appropriate i.e., when the assets are used for service delivery rather than to generate economic benefits or being sold.

The current operational value replaces the replacement cost, as the IPSASB observed that one of the approaches to determining fair value is the cost approach which is determined using the replacement cost. The IPSASB was of the view that continuing to identify replacement cost as a separate measurement basis and also as means to determine the cost approach would create confusion.

Next week’s article provides an overview of the proposed measurement requirements in ED 77.

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.

[1] Value in use continues to be described in the Conceptual Framework as it is relevant for impairment purposes but is not identified as a separate measurement basis.

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.