| IPSASB proposes measuring assets at “current operational value” – what is it? |
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The IPSASB issued ED 77 on Measurement (ED 189 locally) for comment. ED 77 outlines possible measurement bases to be used for assets and liabilities in the public sector and explains how they should be applied.
For assets, the IPSASB proposes the following measurement bases: - Historical cost.
- Fair value.
- Current operational value.
The introduction of fair value in ED 77 meant that changes were needed to the Conceptual Framework.
These changes include adding fair value as a measurement basis, but also changing “replacement cost” to “current operational value”.
Fair value represents the price an entity would receive to sell an asset. As public sector entities do not often sell their assets, the IPSASB confirmed the need for a current value measurement basis that reflects what an entity would pay to replace an asset. When the IPSASB consulted on initial approaches to measurement, respondents indicated that replacement cost could not be both a measurement basis on its own, as well as a means of calculating fair value when using the “cost approach”. “Replacement cost” and the “cost approach” in fair value are most commonly used to measure non-financial assets. It was clear, however, that a new concept was needed. The IPSASB developed “current operational value” as a result.
As “current operational value” is new, there are various issues to consider. The table below outlines the previous and new definitions (own emphasis added).
| Replacement cost | Current operational value | | Previous Conceptual Framework | Proposed revision | | The most economic cost required for the entity to replace the service potential of an asset (including the amount that an entity will receive from its disposal at the end of its life) at the reporting date. | Current operational value is the value of an asset used to achieve the entity’s service delivery objectives at the measurement date.
| Measurement basis | | Cost approach is a measurement technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost). | Measurement technique |
Conceptual difference or not?
Replacement cost focuses on the cost of replacing the service potential of an asset, while current operational value measures the value of an asset used to achieve service delivery objectives. Replacement cost measures how much it would cost to replace an asset that provides specified and quantifiable outputs, e.g. water infrastructure that is required to produce X number of kilolitres per hour. Current operational value seems to extend beyond tangible, quantifiable measures by focusing on the achievement of service delivery objectives more broadly. This seems to include other performance measures within the valuation of an asset.
There is currently no specific measurement basis in the valuation community that specifically measures an asset’s value to achieve service delivery objectives. The valuation community is familiar with, and uses, replacement cost. The change to current operational value may result in increased subjectivity in measurement, and there may be no existing practice on which to base this measurement.
The cost approach uses replacement cost?
In terms of measuring current operational value, there are three techniques that could be used – a market approach , an income approach, and a cost approach (as described in the table above). In the context of using “current operational value”, the cost approach will most likely be used to measure assets that contribute to an entity’s operational capacity. As entities in the public sector most often use their assets to deliver services, it is likely that the cost approach will be used more frequently than the other techniques.
The cost approach directly refers to using replacement cost. It would seem that although current operational value has been used as the overall measurement basis, the actual outcome of the measurement may be no different when replacement cost is used.
While there are specific aspects that need to be debated in both current operational value as a measurement basis and using the cost approach as a measurement technique, a broader question to consider is whether the IPSASB is in a different position to earlier consultations or not.
Have your say …
We look forward to hearing your views on this topic. Access the IPSASB’s Exposure Drafts on our website. The comment deadline is 1 October 2021.
[1] Market approach is a measurement technique that uses prices and other relevant information generated by market transactions involving identical or comparable (i.e., similar) assets, liabilities or a group of assets and liabilities. [2] Income approach is a measurement technique that converts future amounts (e.g., cash flows or revenue and expenses) to a single current (i.e., discounted) amount. [3] The capacity of the entity to support the provision of services in future periods through physical and other resources.
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