Since 1 January 2017, not-for-profit (NFP) entities have been required to determine the recoverable amounts of non-cash-generating assets by reference to the asset’s current replacement cost (as a measure of fair value under the current requirements of AASB 13: Fair Value Measurement) rather than the asset’s depreciated replacement cost (as a measure of value in use under the previous requirements of AASB 136: Impairment of Assets).
Under AASB 136, an entity is required to assess the recoverability of its assets and to recognise an impairment loss if an asset’s carrying amount is greater than its recoverable amount. The recoverable amount of an asset is the higher of the asset’s fair value less costs to sell and value in use.
From 1 January 2017, NFP entities that hold non-cash-generating assets, particularly those specialised in nature and held for continuing use of their service capacity, and account for them under the cost model in AASB 116: Property, Plant and Equipment or AASB 138: Intangible Assets have been required to determine the recoverable amounts of these assets with reference to the fair value measurement guidance contained in AASB 13, rather than the NFP-specific guidance previously contained in AASB 136. AASB 2016-4: Amendments to Australian Accounting Standards – Recoverable Amount of Non-Cash-Generating Specialised Assets of Not-for-Profit Entities, which is effective for annual reporting periods beginning or after 1 January 2017, removes from AASB 136 references to ‘depreciated replacement cost’ (DRC) as a measure of value in use for NFP entities. Consequently, all assets accounted for by NFP entities under the cost model in AASB 116 or AASB 138 are required to be assessed for impairment using the concept of fair value, including current replacement cost (CRC), in AASB 13.
Why did the impairment requirements change?
When International Financial Reporting Standards (IFRS) were first adopted in Australia, the Australian Accounting Standards Board (AASB) included ‘Aus’ paragraphs in a number of Australian equivalents to IFRS, primarily to ensure their application to NFP entities facilitated meaningful and consistent reporting outcomes. Two such Aus paragraphs included in AASB 136 were Aus32.1 and Aus32.2, which stated that:
Notwithstanding paragraphs 30, 31 and 32, in respect of not-for-profit entities, where the future economic benefits of an asset are not primarily dependent on the asset’s ability to generate net cash inflows and where the entity would, if deprived of the asset, replace its remaining future economic benefits, value in use shall be determined as the depreciated replacement cost of the asset.
Depreciated replacement cost is defined as the current replacement cost of an asset less, where applicable, accumulated depreciation calculated on the basis of such cost to reflect the already consumed or expired future economic benefits of the asset. The current replacement cost of an asset is its cost measured by reference to the lowest cost at which the gross future economic benefits of that asset could currently be obtained in the normal course of business.
Many NFP entities, particularly public sector entities, hold specialised assets for continuing use of their service capacity. The primary purpose of AASB 136.Aus32.1 and Aus32.2 was to ensure all non-cash-generating assets held by NFP entities that have positive future economic benefits in the form of service potential were not written down to zero due to the absence of identifiable cash flows.
Following the publication of AASB 13, the AASB received queries from a number of constituents regarding the relationship and the potential interactions between the notion of DRC applicable to NFP entities under AASB 136 and the notion of CRC as a measure of fair value under AASB 13. CRC is the amount that would be required currently to replace the service capacity of an asset. Accordingly, CRC is arguably equivalent to DRC which, as noted above, is the lowest cost at which the gross future economic benefits of an asset could currently be obtained in the normal course of business. Nevertheless, DRC is a measure of value in use under AASB 136 which implies it is an entry price, whereas CRC is a form of fair value and therefore is an exit price.
What do the changes look like?
To avoid confusion between DRC and CRC, AASB 2016-4 amends AASB 136 to:
- remove references to DRC as a measure of value in use for NFP entities; and
- clarify that many assets of NFP entities that are not held primarily for their ability to generate net cash inflows are typically specialised assets held for continuing use of their service capacity. Further, as these types of assets are rarely sold, their cost of disposal is typically negligible. Consequently, the recoverable amount of such assets is expected to be materially the same as fair value, as determined under AASB 13, in which case AASB 136 does not apply to such assets accounted for under the revaluation model in AASB 116 and AASB 138.
How have the changes impacted NFP entities?
As many NFP entities, particularly private sector NFP entities, account for their non-current operating assets under the cost model in AASB 116 and AASB 138, they must continue to test these assets for impairment under AASB 136. The AASB has taken the view that the move from assessing impairment based on an asset’s DRC (under the previous requirements of AASB 136) to its CRC (under the fair value measurement guidance of AASB 13) is unlikely, at least initially, to have a material impact on the determination of the recoverable amounts of specialised assets held by NFP entities. As noted in paragraph BC13 of the Basis for Conclusions to AASB 2016-4:
The AASB concluded that DRC as a measure of value in use of specialised assets that are rarely sold is unlikely to be materially different from DRC (or CRC) as a measure of fair value of such assets. This is because for non-cash-generating specialised assets, the market is typically inactive and their highest and best uses would usually be their current uses rather than their sale, resulting in CRC of such asset being not materially different from their DRC…
Nevertheless, NFP entities still need to assess at the end of each reporting period whether there is an indication that an asset may be impaired, and if an indication exists, determine the recoverable amount of the asset.
Further information and assistance
Contact Pitcher Partners for further information and assistance on the application of the amendments to AASB 136 arising from AASB 2016-4.