Appendix CImpairment testing cash-generating units with goodwill and non-controlling interests ( AASB 138 March 2020 )

This appendix is an integral part of the Standard.

In accordance with AASB 3, the acquirer measures and recognises goodwill as of the acquisition date as the excess of (a) over (b) below:

(a) the aggregate of:

(i) the consideration transferred measured in accordance with AASB 3, which generally requires acquisition-date fair value;

(ii) the amount of any non-controlling interest in the acquiree measured in accordance with AASB 3; and

(iii) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.

(b) the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed measured in accordance with AASB 3.

Paragraph 80 of this Standard requires goodwill acquired in a business combination to be allocated to each of the acquirer’s cash-generating units, or groups of cash-generating units, expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units, or groups of units. It is possible that some of the synergies resulting from a business combination will be allocated to a cash-generating unit in which the non-controlling interest does not have an interest.

Testing for impairment involves comparing the recoverable amount of a cash-generating unit with the carrying amount of the cash-generating unit.

If an entity measures non-controlling interests as its proportionate interest in the net identifiable assets of a subsidiary at the acquisition date, rather than at fair value, goodwill attributable to non-controlling interests is included in the recoverable amount of the related cash-generating unit but is not recognised in the parent’s consolidated financial statements. As a consequence, an entity shall gross up the carrying amount of goodwill allocated to the unit to include the goodwill attributable to the non-controlling interest. This adjusted carrying amount is then compared with the recoverable amount of the unit to determine whether the cash-generating unit is impaired.

Paragraph 104 requires any identified impairment loss to be allocated first to reduce the carrying amount of goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit.

If a subsidiary, or part of a subsidiary, with a non-controlling interest is itself a cash-generating unit, the impairment loss is allocated between the parent and the non-controlling interest on the same basis as that on which profit or loss is allocated.

If a subsidiary, or part of a subsidiary, with a non-controlling interest is part of a larger cash-generating unit, goodwill impairment losses are allocated to the parts of the cash-generating unit that have a non-controlling interest and the parts that do not. The impairment losses should be allocated to the parts of the cash-generating unit on the basis of:

(a) to the extent that the impairment relates to goodwill in the cash-generating unit, the relative carrying values of the goodwill of the parts before the impairment; and

(b) to the extent that the impairment relates to identifiable assets in the cash-generating unit, the relative carrying values of the net identifiable assets of the parts before the impairment. Any such impairment is allocated to the assets of the parts of each unit pro rata on the basis of the carrying amount of each asset in the part.

In those parts that have a non-controlling interest, the impairment loss is allocated between the parent and the non-controlling interest on the same basis as that on which profit or loss is allocated.

If an impairment loss attributable to a non-controlling interest relates to goodwill that is not recognised in the parent’s consolidated financial statements (see paragraph C4), that impairment is not recognised as a goodwill impairment loss. In such cases, only the impairment loss relating to the goodwill that is allocated to the parent is recognised as a goodwill impairment loss.

Illustrative Example 7 illustrates the impairment testing of a non-wholly-owned cash-generating unit with goodwill.

Appendix DAustralian defined terms

This appendix is an integral part of the Standard.

[Deleted by the AASB]

The following terms are also used in this Standard with the meaning specified.

A not-for-profit entity is an entity whose principal objective is not the generation of profit. A not-for-profit entity can be a single entity or a group of entities comprising the parent and each of the entities that it controls.

Appendix EAustralian simplified disclosures for Tier 2 entities

This appendix is an integral part of the Standard.

Paragraphs 126–137 do not apply to entities preparing general purpose financial statements that apply AASB 1060 General Purpose Financial Statements – Simplified Disclosures for For-Profit and Not-for-Profit Tier 2 Entities.

Illustrative examples

Illustrative examples

These examples accompany, but are not part of, AASB 136. All the examples assume that the entities concerned have no transactions other than those described. In the examples monetary amounts are denominated in ‘currency units (CU)’.

Example 1 Identification of cash-generating units

The purpose of this example is:

(a) to indicate how cash-generating units are identified in various situations; and

(b) to highlight certain factors that an entity may consider in identifying the cash-generating unit to which an asset belongs.

Store X belongs to a retail store chain M. X makes all its retail purchases through M’s purchasing centre. Pricing, marketing, advertising and human resources policies (except for hiring X’s cashiers and sales staff) are decided by M. M also owns five other stores in the same city as X (although in different neighbourhoods) and 20 other stores in other cities. All stores are managed in the same way as X. X and four other stores were purchased five years ago and goodwill was recognised.

What is the cash-generating unit for X (X’s cash-generating unit)?

In identifying X’s cash-generating unit, an entity considers whether, for example:

(a) internal management reporting is organised to measure performance on a store-by-store basis; and

(b) the business is run on a store-by-store profit basis or on a region/city basis.

All M’s stores are in different neighbourhoods and probably have different customer bases. So, although X is managed at a corporate level, X generates cash inflows that are largely independent of those of M’s other stores. Therefore, it is likely that X is a cash-generating unit.

If X’s cash-generating unit represents the lowest level within M at which the goodwill is monitored for internal management purposes, M applies to that cash-generating unit the impairment test described in paragraph 90 of AASB 136. If information about the carrying amount of goodwill is not available and monitored for internal management purposes at the level of X’s cash-generating unit, M applies to that cash-generating unit the impairment test described in paragraph 88 of AASB 136.

A significant raw material used for plant Y’s final production is an intermediate product bought from plant X of the same entity. X’s products are sold to Y at a transfer price that passes all margins to X. Eighty per cent of Y’s final production is sold to customers outside of the entity. Sixty per cent of X’s final production is sold to Y and the remaining 40 per cent is sold to customers outside of the entity.

For each of the following cases, what are the cash-generating units for X and Y?

Case 1: X could sell the products it sells to Y in an active market. Internal transfer prices are higher than market prices.

Case 2: There is no active market for the products X sells to Y.

Case 1

X could sell its products in an active market and, so, generate cash inflows that would be largely independent of the cash inflows from Y. Therefore, it is likely that X is a separate cash-generating unit, although part of its production is used by Y (see paragraph 70 of AASB 136).

It is likely that Y is also a separate cash-generating unit. Y sells 80 per cent of its products to customers outside of the entity. Therefore, its cash inflows can be regarded as largely independent.

Internal transfer prices do not reflect market prices for X’s output. Therefore, in determining value in use of both X and Y, the entity adjusts financial budgets/forecasts to reflect management’s best estimate of future prices that could be achieved in arm’s length transactions for those of X’s products that are used internally (see paragraph 70 of AASB 136).

Case 2

It is likely that the recoverable amount of each plant cannot be assessed independently of the recoverable amount of the other plant because:

(a) the majority of X’s production is used internally and could not be sold in an active market. So, cash inflows of X depend on demand for Y’s products. Therefore, X cannot be considered to generate cash inflows that are largely independent of those of Y.

(b) the two plants are managed together.

As a consequence, it is likely that X and Y together are the smallest group of assets that generates cash inflows that are largely independent.

Entity M produces a single product and owns plants A, B and C. Each plant is located in a different continent. A produces a component that is assembled in either B or C. The combined capacity of B and C is not fully utilised. M’s products are sold worldwide from either B or C. For example, B’s production can be sold in C’s continent if the products can be delivered faster from B than from C. Utilisation levels of B and C depend on the allocation of sales between the two sites.

For each of the following cases, what are the cash-generating units for A, B and C?

Case 1: There is an active market for A’s products.

Case 2: There is no active market for A’s products.

Case 1

It is likely that A is a separate cash-generating unit because there is an active market for its products (see Example B – Plant for an intermediate step in a production process, Case 1).

Although there is an active market for the products assembled by B and C, cash inflows for B and C depend on the allocation of production across the two sites. It is unlikely that the future cash inflows for B and C can be determined individually. Therefore, it is likely that B and C together are the smallest identifiable group of assets that generates cash inflows that are largely independent.

In determining the value in use of A and B plus C, M adjusts financial budgets/forecasts to reflect its best estimate of future prices that could be achieved in arm’s length transactions for A’s products (see paragraph 70 of AASB 136).

Case 2

It is likely that the recoverable amount of each plant cannot be assessed independently because:

(a) there is no active market for A’s products. Therefore, A’s cash inflows depend on sales of the final product by B and C.

(b) although there is an active market for the products assembled by B and C, cash inflows for B and C depend on the allocation of production across the two sites. It is unlikely that the future cash inflows for B and C can be determined individually.

As a consequence, it is likely that A, B and C together (ie M as a whole) are the smallest identifiable group of assets that generates cash inflows that are largely independent.

A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-created. The price paid for a purchased magazine title is recognised as an intangible asset. The costs of creating magazine titles and maintaining the existing titles are recognised as an expense when incurred. Cash inflows from direct sales and advertising are identifiable for each magazine title. Titles are managed by customer segments. The level of advertising income for a magazine title depends on the range of titles in the customer segment to which the magazine title relates. Management has a policy to abandon old titles before the end of their economic lives and replace them immediately with new titles for the same customer segment.

What is the cash-generating unit for an individual magazine title?

It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the level of advertising income for a title is influenced, to a certain extent, by the other titles in the customer segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, although titles are managed by customer segments, decisions to abandon titles are made on an individual title basis.

Therefore, it is likely that individual magazine titles generate cash inflows that are largely independent of each other and that each magazine title is a separate cash-generating unit.

M is a manufacturing company. It owns a headquarters building that used to be fully occupied for internal use. After down-sizing, half of the building is now used internally and half rented to third parties. The lease agreement with the tenant is for five years.

What is the cash-generating unit of the building?

The primary purpose of the building is to serve as a corporate asset, supporting M’s manufacturing activities. Therefore, the building as a whole cannot be considered to generate cash inflows that are largely independent of the cash inflows from the entity as a whole. So, it is likely that the cash-generating unit for the building is M as a whole.

The building is not held as an investment. Therefore, it would not be appropriate to determine the value in use of the building based on projections of future market related rents.

Example 2 Calculation of value in use and recognition of an impairment loss

In this example, tax effects are ignored.

At the end of 20X0, entity T acquires entity M for CU10,000. M has manufacturing plants in three countries.

Schedule 1. Data at the end of 20X0

Because goodwill has been allocated to the activities in each country, each of those activities must be tested for impairment annually or more frequently if there is any indication that it may be impaired (see paragraph 90 of AASB 136).

The recoverable amounts (ie higher of value in use and fair value less costs of disposal) of the cash-generating units are determined on the basis of value in use calculations. At the end of 20X0 and 20X1, the value in use of each cash-generating unit exceeds its carrying amount. Therefore the activities in each country and the goodwill allocated to those activities are regarded as not impaired.

At the beginning of 20X2, a new government is elected in Country A. It passes legislation significantly restricting exports of T’s main product. As a result, and for the foreseeable future, T’s production in Country A will be cut by 40 per cent.

The significant export restriction and the resulting production decrease require T also to estimate the recoverable amount of the Country A operations at the beginning of 20X2.

T uses straight-line depreciation over a 12-year life for the Country A identifiable assets and anticipates no residual value.

To determine the value in use for the Country A cash-generating unit (see Schedule 2), T:

(a) prepares cash flow forecasts derived from the most recent financial budgets/forecasts for the next five years (years 20X2–20X6) approved by management.

(b) estimates subsequent cash flows (years 20X7–20Y2) based on declining growth rates. The growth rate for 20X7 is estimated to be 3 per cent. This rate is lower than the average long-term growth rate for the market in Country A.

(c) selects a 15 per cent discount rate, which represents a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the Country A cash-generating unit.

The recoverable amount of the Country A cash-generating unit is CU1,360.

T compares the recoverable amount of the Country A cash-generating unit with its carrying amount (see Schedule 3).

Because the carrying amount exceeds the recoverable amount by CU1,473, T recognises an impairment loss of CU1,473 immediately in profit or loss. The carrying amount of the goodwill that relates to the Country A operations is reduced to zero before reducing the carrying amount of other identifiable assets within the Country A cash-generating unit (see paragraph 104 of AASB 136).

Tax effects are accounted for separately in accordance with AASB 112 Income Taxes (see Illustrative Example 3A).

Schedule 2. Calculation of the value in use of the Country A cash-generating unit at the beginning of 20X2

Schedule 3. Calculation and allocation of the impairment loss for the Country A cash-generating unit at the beginning of 20X2

Example 3 Deferred tax effects

Use the data for entity T as presented in Example 2, with supplementary information as provided in this example.

At the beginning of 20X2, the tax base of the identifiable assets of the Country A cash-generating unit is CU900. Impairment losses are not deductible for tax purposes. The tax rate is 40 per cent.

The recognition of an impairment loss on the assets of the Country A cash-generating unit reduces the taxable temporary difference related to those assets. The deferred tax liability is reduced accordingly.

In accordance with AASB 112 Income Taxes, no deferred tax relating to the goodwill was recognised initially. Therefore, the impairment loss relating to the goodwill does not give rise to a deferred tax adjustment.

An entity has an identifiable asset with a carrying amount of CU1,000. Its recoverable amount is CU650. The tax rate is 30 per cent and the tax base of the asset is CU800. Impairment losses are not deductible for tax purposes. The effect of the impairment loss is as follows:

In accordance with AASB 112, the entity recognises the deferred tax asset to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised.

Example 4 Reversal of an impairment loss

Use the data for entity T as presented in Example 2, with supplementary information as provided in this example. In this example, tax effects are ignored.

In 20X3, the government is still in office in Country A, but the business situation is improving. The effects of the export laws on T’s production are proving to be less drastic than initially expected by management. As a result, management estimates that production will increase by 30 per cent. This favourable change requires T to re-estimate the recoverable amount of the net assets of the Country A operations (see paragraphs 110 and 111 of AASB 136). The cash-generating unit for the net assets of the Country A operations is still the Country A operations.

Calculations similar to those in Example 2 show that the recoverable amount of the Country A cash-generating unit is now CU1,910.

T compares the recoverable amount and the net carrying amount of the Country A cash-generating unit.

Schedule 1. Calculation of the carrying amount of the Country A cash-generating unit at the end of 20X3

There has been a favourable change in the estimates used to determine the recoverable amount of the Country A net assets since the last impairment loss was recognised. Therefore, in accordance with paragraph 114 of AASB 136, T recognises a reversal of the impairment loss recognised in 20X2.

In accordance with paragraphs 122 and 123 of AASB 136, T increases the carrying amount of the Country A identifiable assets by CU387 (see Schedule 3), ie up to the lower of recoverable amount (CU1,910) and the identifiable assets’ depreciated historical cost (CU1,500) (see Schedule 2). This increase is recognised immediately in profit or loss.

In accordance with paragraph 124 of AASB 136, the impairment loss on goodwill is not reversed.

Schedule 2. Determination of the depreciated historical cost of the Country A identifiable assets at the end of 20X3

Schedule 3. Carrying amount of the Country A assets at the end of 20X3

Example 5 Treatment of a future restructuring

In this example, tax effects are ignored.

At the end of 20X0, entity K tests a plant for impairment. The plant is a cash-generating unit. The plant’s assets are carried at depreciated historical cost. The plant has a carrying amount of CU3,000 and a remaining useful life of 10 years.

The plant’s recoverable amount (ie higher of value in use and fair value less costs of disposal) is determined on the basis of a value in use calculation. Value in use is calculated using a pre-tax discount rate of 14 per cent.

Management approved budgets reflect that:

(a) at the end of 20X3, the plant will be restructured at an estimated cost of CU100. Since K is not yet committed to the restructuring, a provision has not been recognised for the future restructuring costs.

(b) there will be future benefits from this restructuring in the form of reduced future cash outflows.

At the end of 20X2, K becomes committed to the restructuring. The costs are still estimated to be CU100 and a provision is recognised accordingly. The plant’s estimated future cash flows reflected in the most recent management approved budgets are given in paragraph IE51 and a current discount rate is the same as at the end of 20X0.

At the end of 20X3, actual restructuring costs of CU100 are incurred and paid. Again, the plant’s estimated future cash flows reflected in the most recent management approved budgets and a current discount rate are the same as those estimated at the end of 20X2.

1. Calculation of the plant’s value in use at the end of 20X0

The plant’s recoverable amount (ie value in use) is less than its carrying amount. Therefore, K recognises an impairment loss for the plant.

Schedule 2. Calculation of the impairment loss at the end of 20X0

No event occurs that requires the plant’s recoverable amount to be re-estimated. Therefore, no calculation of the recoverable amount is required to be performed.

The entity is now committed to the restructuring. Therefore, in determining the plant’s value in use, the benefits expected from the restructuring are considered in forecasting cash flows. This results in an increase in the estimated future cash flows used to determine value in use at the end of 20X0. In accordance with paragraphs 110 and 111 of AASB 136, the recoverable amount of the plant is re-determined at the end of 20X2.

Schedule 3. Calculation of the plant’s value in use at the end of 20X2

The plant’s recoverable amount (value in use) is higher than its carrying amount (see Schedule 4). Therefore, K reverses the impairment loss recognised for the plant at the end of 20X0.

Schedule 4. Calculation of the reversal of the impairment loss at the end of 20X2

There is a cash outflow of CU100 when the restructuring costs are paid. Even though a cash outflow has taken place, there is no change in the estimated future cash flows used to determine value in use at the end of 20X2. Therefore, the plant’s recoverable amount is not calculated at the end of 20X3.

Schedule 5. Summary of the carrying amount of the plant

Example 6 Treatment of future costs

In this example, tax effects are ignored.

At the end of 20X0, entity F tests a machine for impairment. The machine is a cash-generating unit. It is carried at depreciated historical cost and its carrying amount is CU150,000. It has an estimated remaining useful life of 10 years.

The machine’s recoverable amount (ie higher of value in use and fair value less costs of disposal) is determined on the basis of a value in use calculation. Value in use is calculated using a pre-tax discount rate of 14 per cent.

Management approved budgets reflect:

(a) estimated costs necessary to maintain the level of economic benefit expected to arise from the machine in its current condition; and

(b) that in 20X4, costs of CU25,000 will be incurred to enhance the machine’s performance by increasing its productive capacity.

At the end of 20X4, costs to enhance the machine’s performance are incurred. The machine’s estimated future cash flows reflected in the most recent management approved budgets are given in paragraph IE60 and a current discount rate is the same as at the end of 20X0.

1. Calculation of the machine’s value in use at the end of 20X0

The machine’s recoverable amount (value in use) is less than its carrying amount. Therefore, F recognises an impairment loss for the machine.

Schedule 2. Calculation of the impairment loss at the end of 20X0

No event occurs that requires the machine’s recoverable amount to be re-estimated. Therefore, no calculation of recoverable amount is required to be performed.

The costs to enhance the machine’s performance are incurred. Therefore, in determining the machine’s value in use, the future benefits expected from enhancing the machine’s performance are considered in forecasting cash flows. This results in an increase in the estimated future cash flows used to determine value in use at the end of 20X0. As a consequence, in accordance with paragraphs 110 and 111 of AASB 136, the recoverable amount of the machine is recalculated at the end of 20X4.

Schedule 3. Calculation of the machine’s value in use at the end of 20X4

The machine’s recoverable amount (ie value in use) is higher than the machine’s carrying amount and depreciated historical cost (see Schedule 4). Therefore, K reverses the impairment loss recognised for the machine at the end of 20X0 so that the machine is carried at depreciated historical cost.

Schedule 4. Calculation of the reversal of the impairment loss at the end of 20X4

5. Summary of the carrying amount of the machine

Example 7 Impairment testing cash-generating units with goodwill and non-controlling interests

this example, tax effects are ignored.

Parent acquires an 80 per cent ownership interest in Subsidiary for CU2,100 on 1 January 20X3. At that date, Subsidiary’s net identifiable assets have a fair value of CU1,500. Parent chooses to measure the non-controlling interests as the proportionate interest of Subsidiary’s net identifiable assets of CU300 (20% of CU1,500). Goodwill of CU900 is the difference between the aggregate of the consideration transferred and the amount of the non-controlling interests (CU2,100 + CU300) and the net identifiable assets (CU1,500).

The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Therefore Subsidiary is a cash-generating unit. Because other cash-generating units of Parent are expected to benefit from the synergies of the combination, the goodwill of CU500 related to those synergies has been allocated to other cash-generating units within Parent. Because the cash-generating unit comprising Subsidiary includes goodwill within its carrying amount, it must be tested for impairment annually, or more frequently if there is an indication that it may be impaired (see paragraph 90 of AASB 136).

At the end of 20X3, Parent determines that the recoverable amount of cash-generating unit Subsidiary is CU1,000. The carrying amount of the net assets of Subsidiary, excluding goodwill, is CU1,350.

Goodwill attributable to non-controlling interests is included in Subsidiary’s recoverable amount of CU1,000 but has not been recognised in Parent’s consolidated financial statements. Therefore, in accordance with paragraph C4 of Appendix C of AASB 136, the carrying amount of Subsidiary is grossed up to include goodwill attributable to the non-controlling interests, before being compared with the recoverable amount of CU1,000. Goodwill attributable to Parent’s 80 per cent interest in Subsidiary at the acquisition date is CU400 after allocating CU500 to other cash-generating units within Parent. Therefore, goodwill attributable to the 20 per cent non-controlling interests in Subsidiary at the acquisition date is CU100.

1. Testing Subsidiary for impairment at the end of 20X3

In accordance with paragraph 104 of AASB 136, the impairment loss of CU850 is allocated to the assets in the unit by first reducing the carrying amount of goodwill.

Therefore, CU500 of the CU850 impairment loss for the unit is allocated to the goodwill. In accordance with paragraph C6 of Appendix C of AASB 136, if the partially-owned subsidiary is itself a cash-generating unit, the goodwill impairment loss is allocated to the controlling and non-controlling interests on the same basis as that on which profit or loss is allocated. In this example, profit or loss is allocated on the basis of relative ownership interests. Because the goodwill is recognised only to the extent of Parent’s 80 per cent ownership interest in Subsidiary, Parent recognises only 80 per cent of that goodwill impairment loss (ie CU400).

The remaining impairment loss of CU350 is recognised by reducing the carrying amounts of Subsidiary’s identifiable assets (see Schedule 2).

2. Allocation of the impairment loss for Subsidiary at the end of 20X3

this example, tax effects are ignored.

Parent acquires an 80 per cent ownership interest in Subsidiary for CU2,100 on 1 January 20X3. At that date, Subsidiary’s net identifiable assets have a fair value of CU1,500. Parent chooses to measure the non-controlling interests at fair value, which is CU350. Goodwill of CU950 is the difference between the aggregate of the consideration transferred and the amount of the non-controlling interests (CU2,100 + CU350) and the net identifiable assets (CU1,500).

The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Therefore, Subsidiary is a cash-generating unit. Because other cash-generating units of Parent are expected to benefit from the synergies of the combination, the goodwill of CU500 related to those synergies has been allocated to other cash-generating units within Parent. Because Subsidiary includes goodwill within its carrying amount, it must be tested for impairment annually, or more frequently if there is an indication that it might be impaired (see paragraph 90 of AASB 136).

At the end of 20X3, Parent determines that the recoverable amount of cash-generating unit Subsidiary is CU1,650. The carrying amount of the net assets of Subsidiary, excluding goodwill, is CU1,350.

1. Testing Subsidiary for impairment at the end of 20X3

In accordance with paragraph 104 of AASB 136, the impairment loss of CU150 is allocated to the assets in the unit by first reducing the carrying amount of goodwill.

Therefore, the full amount of impairment loss of CU150 for the unit is allocated to the goodwill. In accordance with paragraph C6 of Appendix C of AASB 136, if the partially-owned subsidiary is itself a cash-generating unit, the goodwill impairment loss is allocated to the controlling and non-controlling interests on the same basis as that on which profit or loss is allocated.

this example, tax effects are ignored.

Suppose that, for the business combination described in paragraph IE68A of Example 7B, the assets of Subsidiary will generate cash inflows together with other assets or groups of assets of Parent. Therefore, rather than Subsidiary being the cash-generating unit for the purposes of impairment testing, Subsidiary becomes part of a larger cash-generating unit, Z. Other cash-generating units of Parent are also expected to benefit from the synergies of the combination. Therefore, goodwill related to those synergies, in the amount of CU500, has been allocated to those other cash-generating units. Z’s goodwill related to previous business combinations is CU800.

Because Z includes goodwill within its carrying amount, both from Subsidiary and from previous business combinations, it must be tested for impairment annually, or more frequently if there is an indication that it might be impaired (see paragraph 90 of AASB 136).

At the end of 20X3, Parent determines that the recoverable amount of cash-generating unit Z is CU3,300. The carrying amount of the net assets of Z, excluding goodwill, is CU2,250.

3. Testing Z for impairment at the end of 20X3

In accordance with paragraph 104 of AASB 136, the impairment loss of CU200 is allocated to the assets in the unit by first reducing the carrying amount of goodwill. Therefore, the full amount of impairment loss of CU200 for cash-generating unit Z is allocated to the goodwill. In accordance with paragraph C7 of Appendix C of AASB 136, if the partially-owned Subsidiary forms part of a larger cash-generating unit, the goodwill impairment loss would be allocated first to the parts of the cash-generating unit, Z, and then to the controlling and non-controlling interests of the partially-owned Subsidiary.

Parent allocates the impairment loss to the parts of the cash-generating unit on the basis of the relative carrying values of the goodwill of the parts before the impairment. In this example Subsidiary is allocated 36 per cent of the impairment (450/1,250). The impairment loss is then allocated to the controlling and non-controlling interests on the same basis as that on which profit or loss is allocated.

Example 8 Allocation of corporate assets

In this example, tax effects are ignored.

Entity M has three cash-generating units: A, B and C. The carrying amounts of those units do not include goodwill. There are adverse changes in the technological environment in which M operates. Therefore, M conducts impairment tests of each of its cash-generating units. At the end of 20X0, the carrying amounts of A, B and C are CU100, CU150 and CU200 respectively.

The operations are conducted from a headquarters. The carrying amount of the headquarters is CU200: a headquarters building of CU150 and a research centre of CU50. The relative carrying amounts of the cash-generating units are a reasonable indication of the proportion of the headquarters building devoted to each cash-generating unit. The carrying amount of the research centre cannot be allocated on a reasonable basis to the individual cash-generating units.

The remaining estimated useful life of cash-generating unit A is 10 years. The remaining useful lives of B, C and the headquarters are 20 years. The headquarters is depreciated on a straight-line basis.

The recoverable amount (ie higher of value in use and fair value less costs of disposal) of each cash-generating unit is based on its value in use. Value in use is calculated using a pre-tax discount rate of 15 per cent.

In accordance with paragraph 102 of AASB 136, M first identifies all the corporate assets that relate to the individual cash-generating units under review. The corporate assets are the headquarters building and the research centre.

M then decides how to deal with each of the corporate assets:

(a) the carrying amount of the headquarters building can be allocated on a reasonable and consistent basis to the cash-generating units under review; and

(b) the carrying amount of the research centre cannot be allocated on a reasonable and consistent basis to the individual cash-generating units under review.

The carrying amount of the headquarters building is allocated to the carrying amount of each individual cash-generating unit. A weighted allocation basis is used because the estimated remaining useful life of A’s cash-generating unit is 10 years, whereas the estimated remaining useful lives of B and C’s cash-generating units are 20 years.

Schedule 1. Calculation of a weighted allocation of the carrying amount of the headquarters building

Paragraph 102 of AASB 136 requires first that the recoverable amount of each individual cash-generating unit be compared with its carrying amount, including the portion of the carrying amount of the headquarters building allocated to the unit, and any resulting impairment loss recognised. Paragraph 102 of AASB 136 then requires the recoverable amount of M as a whole (ie the smallest group of cash-generating units that includes the research centre) to be compared with its carrying amount, including both the headquarters building and the research centre.

Schedule 2. Calculation of A, B, C and M’s value in use at the end of 20X0

Schedule 3. Impairment testing A, B and C

The next step is to allocate the impairment losses between the assets of the cash-generating units and the headquarters building.

Schedule 4. Allocation of the impairment losses for cash-generating units B and C

Because the research centre could not be allocated on a reasonable and consistent basis to A, B and C’s cash-generating units, M compares the carrying amount of the smallest group of cash-generating units to which the carrying amount of the research centre can be allocated (ie M as a whole) to its recoverable amount.

Schedule 5. Impairment testing the smallest group of cash-generating units to which the carrying amount of the research centre can be allocated (ie M as a whole)

Therefore, no additional impairment loss results from the application of the impairment test to M as a whole. Only an impairment loss of CU46 is recognised as a result of the application of the first step of the test to A, B and C.

Example 9 Disclosures about cash-generating units with goodwill or intangible assets with indefinite useful lives

The purpose of this example is to illustrate the disclosures required by paragraphs 134 and 135 of AASB 136.

Entity M is a multinational manufacturing firm that uses geographical segments for reporting segment information. M’s three reportable segments are Europe, North America and Asia. Goodwill has been allocated for impairment testing purposes to three individual cash-generating units—two in Europe (units A and B) and one in North America (unit C)—and to one group of cash-generating units (comprising operation XYZ) in Asia. Units A, B and C and operation XYZ each represent the lowest level within M at which the goodwill is monitored for internal management purposes.

M acquired unit C, a manufacturing operation in North America, in December 20X2. Unlike M’s other North American operations, C operates in an industry with high margins and high growth rates, and with the benefit of a 10-year patent on its primary product. The patent was granted to C just before M’s acquisition of C. As part of accounting for the acquisition of C, M recognised, in addition to the patent, goodwill of CU3,000 and a brand name of CU1,000. M’s management has determined that the brand name has an indefinite useful life. M has no other intangible assets with indefinite useful lives.

The carrying amounts of goodwill and intangible assets with indefinite useful lives allocated to units A, B and C and to operation XYZ are as follows:

During the year ending 31 December 20X3, M determines that there is no impairment of any of its cash-generating units or group of cash-generating units containing goodwill or intangible assets with indefinite useful lives. The recoverable amounts (ie higher of value in use and fair value less costs of disposal) of those units and group of units are determined on the basis of value in use calculations. M has determined that the recoverable amount calculations are most sensitive to changes in the following assumptions:

Gross margins during the budget period for A, B and XYZ are estimated by M based on average gross margins achieved in the period immediately before the start of the budget period, increased by 5 per cent per year for anticipated efficiency improvements. A and B produce complementary products and are operated by M to achieve the same gross margins.

Market shares during the budget period are estimated by M based on average market shares achieved in the period immediately before the start of the budget period, adjusted each year for any anticipated growth or decline in market shares. M anticipates that:

(a) market shares for A and B will differ, but will each grow during the budget period by 3 per cent per year as a result of ongoing improvements in product quality.

(b) C’s market share will grow during the budget period by 6 per cent per year as a result of increased advertising expenditure and the benefits from the protection of the 10-year patent on its primary product.

(c) XYZ’s market share will remain unchanged during the budget period as a result of the combination of ongoing improvements in product quality and an anticipated increase in competition.

A and B purchase raw materials from the same European suppliers, whereas C’s raw materials are purchased from various North American suppliers. Raw materials price inflation during the budget period is estimated by M to be consistent with forecast consumer price indices published by government agencies in the relevant European and North American countries.

The 5-year US government bond rate during the budget period is estimated by M to be consistent with the yield on such bonds at the beginning of the budget period. The Japanese yen/US dollar exchange rate is estimated by M to be consistent with the average market forward exchange rate over the budget period.

M uses steady growth rates to extrapolate beyond the budget period cash flows for A, B, C and XYX. The growth rates for A, B and XYZ are estimated by M to be consistent with publicly available information about the long-term average growth rates for the markets in which A, B and XYZ operate. However, the growth rate for C exceeds the long-term average growth rate for the market in which C operates. M’s management is of the opinion that this is reasonable in the light of the protection of the 10-year patent on C’s primary product.

M includes the following disclosure in the notes to its financial statements for the year ending 31 December 20X3.

Impairment Tests for Goodwill and Intangible Assets with Indefinite Lives

Goodwill has been allocated for impairment testing purposes to three individual cash-generating units—two in Europe (units A and B) and one in North America (unit C)—and to one group of cash-generating units (comprising operation XYZ) in Asia. The carrying amount of goodwill allocated to unit C and operation XYZ is significant in comparison with the total carrying amount of goodwill, but the carrying amount of goodwill allocated to each of units A and B is not. Nevertheless, the recoverable amounts of units A and B are based on some of the same key assumptions, and the aggregate carrying amount of goodwill allocated to those units is significant.

Operation XYZ

The recoverable amount of operation XYZ has been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 8.4 per cent. Cash flows beyond that five-year period have been extrapolated using a steady 6.3 per cent growth rate. This growth rate does not exceed the long-term average growth rate for the market in which XYZ operates. Management believes that any reasonably possible change in the key assumptions on which XYZ’s recoverable amount is based would not cause XYZ’s carrying amount to exceed its recoverable amount.

Unit C

The recoverable amount of unit C has also been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 9.2 per cent. C’s cash flows beyond the five-year period are extrapolated using a steady 12 per cent growth rate. This growth rate exceeds by 4 percentage points the long-term average growth rate for the market in which C operates. However, C benefits from the protection of a 10-year patent on its primary product, granted in December 20X2. Management believes that a 12 per cent growth rate is reasonable in the light of that patent. Management also believes that any reasonably possible change in the key assumptions on which C’s recoverable amount is based would not cause C’s carrying amount to exceed its recoverable amount.

Units A and B

The recoverable amounts of units A and B have been determined on the basis of value in use calculations. Those units produce complementary products, and their recoverable amounts are based on some of the same key assumptions. Both value in use calculations use cash flow projections based on financial budgets approved by management covering a four-year period, and a discount rate of 7.9 per cent. Both sets of cash flows beyond the four-year period are extrapolated using a steady 5 per cent growth rate. This growth rate does not exceed the long-term average growth rate for the market in which A and B operate. Cash flow projections during the budget period for both A and B are also based on the same expected gross margins during the budget period and the same raw materials price inflation during the budget period. Management believes that any reasonably possible change in any of these key assumptions would not cause the aggregate carrying amount of A and B to exceed the aggregate recoverable amount of those units.

Compilation detailsAccounting Standard AASB(as amended)

Compilation details are not part of.

This compiled Standard applies to annual periodson or after. It takes into account amendments up to and including 6 March 2020 and was prepared on 21 July 2021 by the staff of the Australian Accounting Standards Board (AASB).

This compilation is not a separate Accounting Standard made by the AASB. Instead, it is a representation of AASB(August 2015) as amended by other Accounting Standards, which are listed in the table below.

The amendments made by this Standard are not included in this compilation, which presents the principal Standard as applicable to annual periods beginning on or after 1 July 2021 but before 1 January 2023.

may elect to apply this Standard to annual periods beginning after 24 July 2014 but before 1 January 2018.

may elect to apply this Standard to annual periods beginning before 1 January 2017.

2016-7 deferred the effective date of AASB 15 (and its consequential amendments in AASB 2014-5) for not-for-profit entities to annual reporting periods beginning on or after 1 January 2019, instead of 1 January 2018. However, earlier application of AASB 136 (2015) incorporating the text that relates to AASB 15 is permitted, provided that AASB 15 is also applied.

may elect to apply this Standard to annual periods beginning before 1 July 2021.

Deletedtext

Deletedtext is not part of.

An entity shall apply this Standard:

(a) to goodwill and intangible assets acquired in business combinations for which the agreement date is on or after 31 March 2004; and

(b) to all other assets prospectively from the beginning of the first annual period beginning on or after 31 March 2004.

Entities to which paragraph 139 applies are encouraged to apply the requirements of this Standard before the effective dates specified in paragraph 139. However, if an entity applies this Standard before those effective dates, it also shall apply IFRS 3 and IAS 38 (as revised in 2004) at the same time.

IAS 1 Presentation of Financial Statements (as revised in 2007) amended the terminology used throughout IFRSs. In addition it amended paragraphs 61, 120, 126 and 129. An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. If an entity applies IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for that earlier period.

IFRS 3 (as revised in 2008) amended paragraphs 65, 81, 85 and 139, deleted paragraphs 91–95 and 138 and added Appendix C. An entity shall apply those amendments for annual periods beginning on or after 1 July 2009. If an entity applies IFRS 3 (revised 2008) for an earlier period, the amendments shall also be applied for that earlier period.

Paragraph 134(e) was amended by Improvements to IFRSs issued in May 2008. An entity shall apply that amendment for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the amendment for an earlier period it shall disclose that fact.

IFRS 10 and IFRS 11, issued in May 2011, amended paragraph 4, the heading above paragraph 12(h) and paragraph 12(h). An entity shall apply those amendments when it applies IFRS 10 and IFRS 11.

IFRS 13, issued in May 2011, amended paragraphs 5, 6, 12, 20, 22, 28, 78, 105, 111, 130 and 134, deleted paragraphs 25–27 and added paragraph 53A. An entity shall apply those amendments when it applies IFRS 13.

In May 2013 paragraphs 130 and 134 and the heading above paragraph 138 were amended. An entity shall apply those amendments retrospectively for annual periods beginning on or after 1 January 2014. Earlier application is permitted. An entity shall not apply those amendments in periods (including comparative periods) in which it does not also apply IFRS 13.

This Standard supersedes IAS 36 Impairment of Assets (issued in 1998).

Basis for Conclusions on AASB 2016-4

This Basis for Conclusions accompanies, but is not part of, AASB 136. The Basis for Conclusions was originally published with AASB 2016-4 Amendments to Australian Accounting Standards – Recoverable Amount of Non-Cash-Generating Specialised Assets of Not-for-Profit Entities.

This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in Accounting Standard AASB 2016-4 Amendments to Australian Accounting Standards – Recoverable Amount of Non-Cash-Generating Specialised Assets of Not-for-Profit Entities. Individual AASB members gave greater weight to some factors than to others.

Under AASB 136 Impairment of Assets (July 2004 and August 2015), an impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs of disposal (‘net fair value’) and its value in use.

Paragraph Aus32.1 to AASB 136, required not-for-profit (NFP) entities to determine the value in use of an asset as its depreciated replacement cost (DRC) when the future economic benefits of the 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. Paragraph Aus6.2 to AASB 136 defined DRC 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”. Paragraph Aus32.2 explained that “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”.

The AASB previously concluded that the Aus paragraphs were needed in AASB 136 to help ensure impairments are not recognised for non-cash-generating assets held by NFP entities when they still embody future economic benefits of a value equal to, or greater than, their carrying amounts. This was based on the view that entities might inappropriately recognise impairment due to the focus of IAS 36 Impairment of Assets, which is incorporated into AASB 136, on cash-generating assets. The value in use of a non-cash-generating asset based on cash flows would be zero or close to zero and the net fair value of the asset could be regarded as relating to a scrap value for a specialised asset.

Clarifications were sought by some constituents about the interaction between the notion of DRC for determining the value in use of assets held by NFP entities in the circumstances described in paragraph BC3 and the notion of current replacement cost (CRC) as a measure of the fair value of an asset under the cost approach in AASB 13 Fair Value Measurement. AASB 13 (paragraphs B8 and B9) identifies the cost approach as a valuation technique for measuring fair value. Under AASB 13, the cost approach reflects the amount that would be required currently to replace the service capacity of an asset.

Some commentators argued that, consistent with the role of CRC as a measure of fair value under AASB 13 (reflecting the assumptions that market participants would use when pricing the asset), DRC should not be an entity-specific measure of recoverable amount under AASB 136. These commentators supported the objective of the existing requirements of AASB 136 of not basing the recoverable amount of primarily non-cash-generating assets held by NFP entities on discounted cash flows. They also noted that when DRC was included in AASB 116 Property, Plant and Equipment (July 2004), there was ambiguity as to whether it was a measure of fair value or a measure of value in use and that with the publication of AASB 13 and its exposition of the cost approach, it became clear that DRC under the AASB 116 is a measure of fair value as is CRC under AASB 13. Accordingly, for such assets, they argued that DRC should be used to determine fair value as a measure of recoverable amount and noted that its designation as a measure of value in use under AASB 136 might be a source of confusion.

Other commentators argued that DRC is identified as a measure of fair value in paragraph 33 to AASB 116 (July 2004) , in cases where there is no market-based evidence of fair value because of the specialised nature of the asset and the item is rarely sold, except as part of a continuing business. They noted that, with the publication of AASB 13, the cost approach plays a similar role as a measure of fair value when the market and income approaches to valuation are not applicable due to the specialised nature of the asset.

Further comments on the interaction between DRC under AASB 136 and CRC under AASB 13 were sought in AASB outreach with key stakeholders, such as preparers and auditors, and valuers of NFP entities’ assets, particularly in regard to assets held by public sector entities.

Comments from some preparers in the public sector who participated in the outreach indicated that separate evaluations of CRC as a measure of fair value under AASB 13 and DRC as a measure of value in use under AASB 136 are not usually performed. These commentators noted that, although CRC as a measure of fair value under AASB 13 and DRC as a measure of value in use under AASB 136 are different in concept, for specialised assets where the market is typically inactive, the highest and best use is generally their current use. Accordingly, in their view the CRC of such assets under AASB 13 and their DRC under AASB 136 are, in practice, interchangeable. Some noted one reason for this outcome is that highest and best use requires consideration of reasonably possible uses, not every possible use.

Some valuers participating in staff outreach noted:

in the case of a NFP entity where the fair value of a specialised asset is based on the cost approach, the entity acts as the ‘buyer’ and is competing with other market participants in order to acquire the asset. They argue that this means CRC under AASB 13 should not be different from DRC under AASB 136;

CRC under AASB 13 and DRC under AASB 136 are regarded as similar measures of fair value and the existing use or alternative uses are considered and assessed on a case-by-case basis; and

the highest and best use of an asset determines its fair value, but restrictions (such as legal restrictions) on the use of an asset often mean that the highest and best use of an asset is its current use.

The AASB noted that DRC is identified as a measure of fair value in paragraph 33 to AASB 116 (July 2004) in cases where there is no market-based evidence of fair value because of the specialised nature of the asset and the item is rarely sold, except as part of a continuing business. The AASB also noted that, with the publication of AASB 13, CRC plays a similar role for assets that are specialised in nature and are rarely sold, such as many assets held by public sector entities. The AASB further noted that the cost of disposal of such assets is not expected to be material.

The AASB noted that fair value under AASB 13 is defined as an exit price. Therefore, CRC under AASB 13 is conceptually different from DRC as a measure of value in use under AASB 136, being an entry price. The AASB noted, however, that:

the description of the cost approach in AASB 13 indicates that CRC incorporates obsolescence as does the definition of DRC under AASB 136, where accumulated depreciation encompasses obsolescence;

valuers use similar approaches in determining DRC and CRC. Factors such as physical obsolescence, functional obsolescence and economic obsolescence are all considered in determining each measure; and

valuers’ practice involves considering as a starting point whether the valuation is of a specialised asset in its current use or an alternative use and whether there are any restrictions on the use of the asset.

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 assets being not materially different from their DRC, as the following example shows:

Example

An entity self-constructs a specialised facility. Because this is the entity’s specific practice in its industry, it can construct the facility for $8.5 million, whereas the cost of construction of the facility to any other market participant would be $10 million. As the construction of the facility has just been completed, there is no obsolescence or depreciation.

The issues are: (a) whether the CRC of the facility should be measured at $10 million or $8.5m under AASB 13; and (b) whether the DRC of the facility should be measured at $10m or $8.5m under AASB 136.

Analysis

Paragraph B9 to AASB 13 states that “a market participant buyer would not pay more for an asset than the amount for which it could replace the service capacity of that asset”. The implication of that statement depends on whether the market participant buyer includes, or has the attributes of, the vendor. Paragraph BC78 of the IASB’s Basis for Conclusions on IFRS 13 Fair Value Measurement states that, in relation to a specialised non-financial asset, “In effect, the market participant buyer steps into the shoes of the entity that holds that specialised asset” (emphasis added). Based on that comment, it seems appropriate in the above example to regard the market participant buyer as being capable of self-constructing the asset for $8.5 million, in which case CRC should be measured at $8.5 million under AASB 13. Because value in use is an entity-specific measure, the DRC of the facility would also be measured at $8.5 million under AASB 136.

The AASB noted that, when the AASB 136 impairment model (as per IAS 36) is applied to non-cash-generating specialised assets that are rarely sold, the value in use of the asset is typically less than its net fair value because the asset is generally held for continuing use of its service capacity, not the generation of cash inflows. Further, because these assets are rarely sold, their cost of disposal is typically negligible. The AASB concluded that, in such circumstances, the recoverable amount of the asset would be materially the same as fair value determined under AASB 13.

The AASB noted that AASB 13 has addressed the concerns identified in paragraph BC4 above that the net fair value of an asset could be regarded as relating to a scrap value for a specialised asset leading to an inappropriate recognition of impairment. Paragraph BC78 of the IASB’s Basis for Conclusions on IFRS 13 refers to the concerns that an exit price would be based on scrap value (particularly given the requirement to maximise the use of observable inputs, such as market prices) and not reflect the value that an entity expects to generate by using the asset in its operations. It notes that, in such circumstances, the scrap value for an individual asset would be irrelevant because an exit price reflects the sale of the asset to a market participant that has, or can obtain, the complementary assets and the associated liabilities needed to use the specialised asset in its own operations. In effect, the market participant buyer steps into the shoes of the entity that holds that specialised asset.

The AASB noted that, with the issuance of AASB 13, the fair value of non-financial assets is determined under that Standard. Accordingly, with the CRC measure being available under AASB 13, the notion of DRC included in AASB 116 (July 2004) would no longer be applicable in estimating the fair value of specialised non-financial assets.

ED 269 proposals

The AASB published ED 269 Recoverable Amount of Non-cash-generating Specialised Assets of Not-for-Profit Entities proposing that:

references to DRC as a measure of value in use in AASB 136 be deleted from that Standard; and

paragraph Aus5.1 be included in AASB 136 to clarify that, because primarily non-cash-generating specialised assets held for continuing use of their service capacity are rarely sold, their cost of disposal is typically negligible and, accordingly, the recoverable amount of such assets is expected to be materially the same as fair value, determined under AASB 13.

The Board noted with the removal of DRC as a measure of value in use from AASB 136, the recoverable amount of a primarily non-cash-generating specialised asset held by an NFP entity for continuing use of its service capacity is determined as the higher of value in use and net fair value. The recoverable amount would be fair value since the value in use of a primarily non-cash-generating asset would be small or close to zero.

The ED 269 proposals identified implications for assets held both under the revaluation model and under the cost model as outlined below:

Revaluation model

NFP entities that regularly revalue their primarily non-cash-generating specialised assets to fair value would find the application of the impairment model under AASB 136 redundant.

Cost model

If there are indicators of impairment, NFP entities applying the cost model to their primarily non-cash-generating specialised assets would need to determine their recoverable amounts at fair value to establish whether there is a need to recognise impairment.

The AASB considered comments on the ED 269 proposals received via submissions and further AASB targeted outreach. The AASB noted that commentators were generally supportive of ED 269 proposals and discussed concerns raised about some aspects of the proposals.

Clarifying CRC

Some valuation industry participants consulted in AASB outreach were of the view that some constituents continue to see CRC under AASB 13 as the gross replacement cost of a new asset rather than the CRC of the remaining service capacity of the asset. The AASB observed that:

paragraph B8 to AASB 13 describes CRC as the amount that would be required currently to replace the service capacity of an asset. This is a reference to replacement cost of the service capacity of the asset and not a new asset; and

paragraph B9 to AASB 13 further clarifies that the price that would be received for the asset is based on the cost to a market participant buyer to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence and that obsolescence encompasses physical deterioration, functional (technological) obsolescence and economic (external) obsolescence.

The AASB concluded that the description of CRC in AASB 13 is clear that CRC is not a gross value reflecting the replacement cost of a new asset, rather it is replacement cost of the remaining service capacity of the asset.

The AASB also confirmed its view that DRC under AASB 136 is equivalent to CRC under AASB 13. It was noted that the description of the cost approach in AASB 13 indicates that CRC incorporates obsolescence as did the definition of DRC under AASB 136, where accumulated depreciation encompasses obsolescence. It also noted that valuation industry participants in AASB outreach generally were of the view that the description of CRC in AASB 13 is consistent with their current valuation practice for determining DRC under a cost approach in that the replacement cost or reproduction cost of a new equivalent asset is adjusted for all relevant types of obsolescence and the issue of overcapacity is also considered in arriving at an optimised value.

Some commentators noted that the capitalisation of borrowing costs assumed in the example in paragraph BC14 to ED 269 was not common for NFP public sector entities because the ABS GFS Manual prohibits capitalisation of borrowing costs. The AASB noted that capitalisation of borrowing costs would need to be addressed as part of another project.

Disposal costs associated with specialised assets

Some participants in AASB outreach noted the costs of disposal might not be negligible in some cases where non-cash-generating specialised assets are involved. Some had in mind a range of costs they considered potentially material that could be associated with making an asset saleable. As an example, they noted those costs might include material costs of rezoning land.

The AASB noted that IFRS 13, Illustrative Example 8, clarifies the type of costs that would need to be considered in determining the fair value of assets. In illustrating the determination of highest and best use, the example contrasts the value of land currently developed for industrial use with the land as a vacant site for residential use. In identifying the fair value of the land as a vacant site for residential use it considers the costs of demolishing the factory and other costs necessary to convert the land to a vacant site.

The AASB noted that disposal costs are costs incurred to sell the asset in its existing state (target asset). The AASB confirmed that, consistent with the example noted in paragraph BC26, costs incurred to enhance the use of an asset, change its nature, or make it marketable would be considered in fair valuing the enhanced asset. Such costs would not be disposal costs of the target asset for the purpose of calculating net fair value. Accordingly, land rezoned for residential or commercial use is a different asset from land with zoning as public land and costs such as decommissioning costs or rezoning costs that change the nature of the asset are not classified as disposal costs of the land in its public use.

The AASB also noted that disposal costs are ‘normal’ incremental costs directly attributable to disposal of an asset and are not intended to include excessive costs arising from the processes to sell particular assets.

Impairment of revalued assets

Some commentators expressed the view that it was not sufficiently clear whether the proposed paragraph Aus5.1 would apply only to NFP entities as it does not explicitly preclude application by for-profit entities. The AASB confirmed that paragraph Aus5.1 would apply only to primarily non-cash-generating specialised assets of NFP entities held for their service capacity and would not apply to assets of for-profit entities whether or not held for their service capacity.

Some participants in AASB outreach commented that ED 269 is not clear as to whether it would mean that consideration does not need to be had to whether revalued assets of NFP entities would still need to be tested for impairment if an impairment trigger were present.

The AASB noted that the objective of removing references to DRC from AASB 136 and determining recoverable amount as fair value is to reduce financial reporting costs to NFP entities holding specialised assets that are held for continuing use of their service capacity. The AASB considered that this is consistent with its Process for Modifying IFRSs for NFPs which notes that “In some cases, the context or increased or reduced prevalence of a transaction or event for PBE/NFP as compared with for-profit entities, may require modifications to the relevant IFRS to ensure that user needs are met while considering the balance between costs and benefits”. The AASB noted that revaluation of non-financial assets in the Australian NFP public sector is more prevalent than in the for-profit sector. The AASB concluded that when non-cash-generating specialised assets of NFP entities that are held for the continuing use of their service capacity are revalued regularly to fair value under the revaluation model in AASB 116 and AASB 138 Intangible Assets, the entity no longer applies AASB 136 to such assets. This is because regular revaluation ensures such assets are carried at an amount that is not materially different from fair value and any impairment would be taken into account as part of revaluation. For such assets, the issue of determining recoverable amount of the asset and magnitude of disposal costs would not be relevant.

The AASB noted that an entity holding an asset with the intention of selling it would need to apply AASB 5 Non-current Assets Held for Sale and Discontinued Operations and AASB 136 would not apply.

The AASB decided to proceed with the ED 269 proposals with amendments based on the conclusion noted in paragraph BC31.

The AASB noted that AASB 101 Presentation of Financial Statements and AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors would apply in implementing the amendments and in respect of comparative information. The AASB also noted that it would not expect the amendments to AASB 136 to change current practice materially.