The future for the replacement cost in the International Public Sector Accounting Standards

Teresa Izzo,Matteo Pozzoli,Francesco Paolone

doi:10.22495/rgcv11i3p1

Abstract

The purpose of this paper is to review academic literature and professional practice guidance in relation to the replacement cost (RC) method of valuation in public sector financial accounting. The replacement cost is regarded as being the most appropriate basis for the determination of fair value when the fair value of the asset could not be reliably determined using market-based evidence (Wyatt, 2009). However, several problems persist in RC definition and application, underlining the lack of a uniform approach in the current valuation standards. The paper explores the current adoption of RC by performing a content analysis of the latest financial statements published by International Public Sector Accounting Standards (IPSAS) adopter jurisdictions across the globe. The analysis highlights interesting patterns in the use of RC and provides an empirical base for further investigations. Additionally, the research offers useful insights to stimulate professional and academic debate on the replacement cost method, particularly in view of amendments proposed by the recently published Exposure Draft.

Highlights

Fair value measurement is a complex and debated issue in public sector accounting
International Public Sector Accounting Standards (IPSAS) are based on International Financial Reporting Standards (IFRS) when it comes to covering some specific peculiarities of the public sector
The fact that IFRS may represent a benchmark for addressing IPSAS has been criticised by scholars because they do not take into account public sector dynamics (Grossi & Soverchia, 2011; Biondi, 2012)

Summary

Introduction

Fair value measurement is a complex and debated issue in public sector accounting. Often, this value has been determined in practice by the replacement cost (RC) method, which is a measurement method not sufficiently investigated in recent times both in the private and public sectors (Boer, 1966).Measurement criteria aim to provide stakeholders with useful information. Public sector entities pursue public interests and contextually should be oriented to optimize the use of available resources to guarantee the groups of interests with regard to the capability of the entity‘s administration (Christiaens, Vanhee, Manes-Rossi, Aversano, & Van Cauwenberge, 2015). This implies that the aforementioned criteria have to be accurately analysed by the accounting standard setters in order to satisfy the stakeholders‘ information needs, obviously taking into consideration the entities‘ mission and the contextualization of the generally recognized criteria usually applied and consolidated in the private for-profit sector. The IFRS framework is structured for firms with a specific goal of maximizing profit and value, but it is meaningless for governments, which attempt to fulfil operational objectives intended to satisfy social needs and achieve collective well-being (Biondi, 2012; Brusca, Gómez‐Villegas, & Montesinos, 2016)

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