Valuations in the Public Sector
Are we seeing tangible steps towards an international consensus?
The International Public Sector Accounting Standards Board (IPSASB) develops financial reporting standards for public sector entities (IPSAS). Some may wonder why these are needed when there are the International Financial Reporting Standards (IFRS) which are now used or recognised in nearly 150 countries around the World. However, problems can arise in trying to apply IFRS to organisations that exist not to generate financial returns for investors but to provide public services, many of which are not directly cash generating. The IPSAS are based on the principles in IFRS but with necessary adaptations to reflect matters that are particular to the public sector.
One of the main difficulties in applying IFRS to the public sector is around measurement, and in particular valuation. Like the private sector, public sector entities have assets and liabilities but the question of how the benefit of these should be measured in the financial statements has proved an intractable problem. There is very little consistency between countries on either what types of asset or liability should be included in public sector accounts, and when they are, whether they are measured on the basis of what they cost to provide or on some form of current value.
The differences between countries are profound. Some include mineral rights; others disregard them entirely. Some seek to measure the value of roads and public utilities; others consider that the benefit of public infrastructure is in the added value to the economy as a whole. Some consider only created assets should be reflected in public accounts and exclude all publicly held land.
Why does this matter? Unlike companies where an obligation to report performance consistently is necessary for investor information and regulatory oversight, governments are sovereign and can set the rules to suit their circumstances. However, since governments also borrow in the financial markets, the integrity of their public accounts is becoming a matter of increasing concern, as is the need for comparisons between countries. As long ago as 2013 the IMF published a working paper that examined the role of non-financial assets in government accounting and debt management across more than thirty countries. This highlighted significant discrepancies and concluded that improving the consistency and transparency of data about the extent and value of assets would improve economic management.
In 2015 the IPSASB issued its "Conceptual Framework for General Purpose Financial Reporting by Public Entities" This requires a preparer of accounts under IPSAS 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." It acknowledges that sometimes this may be historic cost and sometimes current value and goes on to identify various measurement bases that may be applied.
In April 2019 the Board issued a consultation paper for a possible new standard on Measurement that will examine the various measurement bases set out in the Conceptual Framework and provide guidance on their application. We submitted comments on this. We understand that the IPSAS Board approved an Exposure Draft in late February 2021 and this is expected to be released in early April.
To ensure that the proposals for valuation are not only technically correct but also address the range of challenges that are faced when a request is received to place a value on a publicly owned asset or liability, it is important that the valuation profession engages with these proposals.