May 2021 Q1 b.
Implementation of the International Public Sector Accounting Standards (IPSAS) is a priority of Government in 2021, and the Controller and Accountant General is doing everything possible to ensure effective implementation. One major concern of the implementors is a measurement of public assets, as these assets are numerous, varied and acquired in different ways. Nevertheless, assets need to be measured and recognised in accordance with IPSAS.
Required:
i) Explain the objectives of Measurement in Financial Reporting under IPSAS. (4 marks)
View Solution
Measurement objective
The objective of measurement is: to select those measurement bases that most fairly reflect the cost of services, operational capacity and financial capacity of the entity in a manner that is useful in holding the entity to account and for decision-making purposes. (1 mark)
The selection of a measurement basis for assets and liabilities contributes to meeting the objectives of financial reporting in the public sector by providing information that enables users to assess:
- The cost of services provided in the period in historical or current terms;
- Operational capacity—the capacity of the entity to support the provision of services in future periods through physical and other resources; and
- Financial capacity—the capacity of the entity to fund its activities.
(3 points for 3 marks)
ii) Explain FOUR (4) Measurement Bases for assets in line with the Conceptual Framework of General Purpose Financial Report. (6 marks)
View Solution
Historical cost
Historical cost for an asset is the consideration given to acquire or develop an asset, which is the cash or cash equivalents or the value of the other consideration given at the time of its acquisition or development.
Under the historical cost model, assets are initially reported at the cost incurred on their acquisition. Subsequent to initial recognition, this cost may be allocated as an expense to reporting periods in the form of depreciation or amortisation for certain assets, as the service potential or ability to generate economic benefits provided by such assets are consumed over their useful lives. In addition, under the historical cost mode,l the amount of an asset may be reduced by recognising impairments.
Market value
Market value for assets is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.
At acquisition, market value and historical cost will be the same if transaction costs are ignored and the transaction is an exchange transaction. The extent to which market value meets the objectives of financial reporting and users’ information needs partially depends on the quality of the market evidence.
Replacement cost
Replacement cost is the most economical cost required for the entity to replace the service potential of an asset (including the amount that the entity will receive from its disposal at the end of its useful life) at the reporting date.
Replacement cost reflects the replacement of service potential in the normal course of operations, not the costs that might be incurred if an urgent necessity arose due to some unforeseeable event, such as a fire.
Net selling price
Net selling price is the amount that the entity can obtain from the sale of the asset after deducting the costs of sale.
Net selling price differs from market value in that it does not require an open, active and orderly market or the estimation of a price in such a market and includes the entity’s costs of sale. Net selling price, therefore, reflects constraints on sale. It is entity-specific.
Value in Use
Value in use is the present value to the entity of the asset’s remaining service potential or ability to generate economic benefits if it continues to be used and the net amount that the entity will receive from its disposal at the end of its useful life.
Value in use is an entity-specific value that reflects the amount derived from an asset through its operation and its disposal at the end of its useful life. Value in use is also not an appropriate measurement basis when the net selling price is more significant than value in use. In this case the most resource-efficient use of the asset is to sell it, rather than continue to use it.
(Any four points @ 1 ½ marks each = 6 marks)