AASB 136 Impairment of Assets July 2004 (Cth)

Compiled AASB Standard

AASB 136

Impairment of Assets

This compiled Standard applies to annual reporting periods beginning on or after 1 January 2018. However, for such periods this principal Standard has been superseded by AASB 136 (August 2015), but can be applied early. Early application is permitted for annual reporting periods beginning after 24 July 2014 but before 1 January 2018. It incorporates relevant amendments made up to and including 27 June 2016.

Prepared on 20 March 2017 by the staff of the Australian Accounting Standards Board.

Compilation no. 16

Compilation date: 31 December 2016

Obtaining Copies of Accounting Standards

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COMPILATION DETAILS

COMPARISON WITH IAS 36

ACCOUNTING STANDARD

AASB 136 IMPAIRMENT OF ASSETS

Paragraphs

Objective 1

Application Aus1.1 – Aus1.7

Reduced Disclosure Requirements Aus1.8 – Aus1.9

Scope 2 – Aus5.1

Definitions 6 – Aus6.2

Identifying an Asset that may be Impaired 7 – 17

Measuring Recoverable Amount 18 – 23

Measuring the Recoverable Amount of an Intangible Asset with an Indefinite Useful Life 24

Fair Value less Costs of Disposal 28 – 29

Value in Use 30 – 32

Basis for Estimates of Future Cash Flows 33 – 38

Composition of Estimates of Future Cash Flows 39 – 53A

Foreign Currency Future Cash Flows 54

Discount Rate 55 – 57

Recognising and Measuring an Impairment Loss 58 – 64

Cash-generating Units and Goodwill 65

Identifying the Cash-generating Unit to Which an Asset Belongs 66 – 73

Recoverable Amount and Carrying Amount of a Cash-generating Unit 74 – 79

Goodwill

Allocating Goodwill to Cash-generating Units 80 – 87

Testing Cash-generating Units with Goodwill for Impairment 88 – 90

Timing of Impairment Tests 96 – 99

Corporate Assets 100 – 103

Impairment Loss for a Cash-generating Unit 104 – 108

Reversing an Impairment Loss 109 – 116

Reversing an Impairment Loss for an Individual Asset 117 – 121

Reversing an Impairment Loss for a Cash-generating Unit 122 – 123

Reversing an Impairment Loss for Goodwill 124 – 125

Disclosure 126 – 133

Estimates used to Measure Recoverable Amounts of Cash-generating Units Containing Goodwill or Intangible Assets with Indefinite Useful Lives 134 – 137

Transition Provisions and Effective Date 140C – 140M

Appendix:

A. Using Present Value Techniques to Measure Value in Use Page 30

C. Impairment Testing Cash-generating Units with Goodwill and Non-controlling Interests Page 33

ILLUSTRATIVE EXAMPLES Page 35

DELETED IAS 36 TEXT Page 55

BASIS FOR CONCLUSIONS ON AASB 2016-4 Page 56

BASIS FOR CONCLUSIONS ON IAS 36

(available on the AASB website)

Australian Accounting Standard AASB 136 Impairment of Assets (as amended) is set out in paragraphs 1 – 140M and Appendices A and C. All the paragraphs have equal authority. Terms defined in this Standard are in italics the first time they appear in the Standard. AASB 136 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation of Standards, which identifies the Australian Accounting Interpretations. In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies.

COMPILATION DETAILS

Accounting Standard AASB 136 Impairment of Assets as amended

This compiled Standard applies to annual reporting periods beginning on or after 1 January 2018. However, for such periods this principal Standard has been superseded by AASB 136 (August 2015), but can be applied early. It takes into account amendments up to and including 27 June 2016 and was prepared on 20 March 2017 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 136 (July 2004) as amended by other Accounting Standards, which are listed in the Table below.

Table of Standards

Standard	Date made	Application date (annual reporting periods … on or after …)	Application, saving or transitional provisions
AASB 136	15 Jul 2004	(beginning) 1 Jan 2005
AASB 2007-3	26 Feb 2007	(beginning) 1 Jan 2009	see (a) below
AASB 2007-4	30 Apr 2007	(beginning) 1 Jul 2007	see (b) below
AASB 2007-8	24 Sep 2007	(beginning) 1 Jan 2009	see (c) below
AASB 2007-10	13 Dec 2007	(beginning) 1 Jan 2009	see (c) below
AASB 2008-3	6 Mar 2008	(beginning) 1 Jul 2009	see (d) below
AASB 2008-5	24 Jul 2008	(beginning) 1 Jan 2009	see (e) below
AASB 2008-7	25 Jul 2008	(beginning) 1 Jan 2009	see (f) below
AASB 2009-5	21 May 2009	(beginning) 1 Jan 2010	see (g) below
AASB 2009-6	25 Jun 2009	(beginning) 1 Jan 2009 and (ending) 30 Jun 2009	see (h) below
AASB 2009-7	25 Jun 2009	(beginning) 1 Jul 2009	see (i) below
AASB 2009-11	7 Dec 2009	(beginning) 1 Jan 2018	see (j) below
AASB 2010-2	30 Jun 2010	(beginning) 1 Jul 2013	see (k) below
AASB 2010-7	6 Dec 2010	(beginning) 1 Jan 2018	see (l) below
AASB 2011-7	29 Aug 2011	(beginning) 1 Jan 2013	see (m) below
AASB 2011-8	2 Sep 2011	(beginning) 1 Jan 2013	see (n) below
AASB 2013-3	27 Jun 2013	(beginning) 1 Jan 2014	see (o) below
AASB 2013-6	27 Sep 2013	(beginning) 1 Jan 2014	see (p) below
AASB 2013-9	20 Dec 2013	Pt B (beginning) 1 Jan 2014	see (q) below
AASB 2014-1	4 Jun 2014	Pt E (beginning) 1 Jan 2018	see (r) below
AASB 2014-5	12 Dec 2014	(beginning) 1 Jan 2018	see (s) below
AASB 2014-6	12 Dec 2014	(beginning) 1 Jan 2016	see (t) below
AASB 2014-7	17 Dec 2014	(beginning) 1 Jan 2018	see (u) below
AASB 2015-8	22 Oct 2015	(beginning) 1 Jan 2017	see (v) below
AASB 2016-4	27 Jun 2016	(beginning) 1 Jan 2017	see (w) below

(a) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009, provided that AASB 8 Operating Segments is also applied to such periods.

(b) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 July 2007.

(c) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009, provided that AASB 101 Presentation of Financial Statements (September 2007) is also applied to such periods.

(d) Entities may elect to apply this Standard to annual reporting periods beginning on or after 30 June 2007 but before 1 July 2009, provided that AASB 3 Business Combinations (March 2008) and AASB 127 Consolidated and Separate Financial Statements (March 2008) are also applied to such periods.

(e) Paragraph 59 of this Standard specifies application provisions. Entities may elect to apply this Standard, or its amendments to individual Standards, to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009.

(f) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009.

(g) Entities may elect to apply this Standard, or its amendments to individual Standards, to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2010.

(h) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009, provided that AASB 101 Presentation of Financial Statements (September 2007) is also applied to such periods, and to annual reporting periods beginning on or after 1 January 2009 that end before 30 June 2009.

(i) Entities may elect to apply this Standard to annual reporting periods beginning before 1 July 2009 that end on or after 1 July 2008.

(j) AASB 2009-11 has been amended by AASB 2010-10 (made 31 December 2010) and AASB 2012-6 (made 10 September 2012). Part E of AASB 2014-1 (made 4 June 2014) updated the application date of the amendments in this Standard to 1 January 2018.

Entities may elect to apply the amendments in this Standard to annual reporting periods ending on or after 31 December 2009 that begin before 1 January 2018, provided that AASB 9 (2009) Financial Instruments is also applied to such periods.

(k) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 July 2009 but before 1 July 2013, provided that AASB 1053 Application of Tiers of Australian Accounting Standards is also applied to such periods.

(l) AASB 2010-7 has been amended by AASB 2010-10 (made 31 December 2010) and AASB 2012-6 (made 10 September 2012). Part E of AASB 2014-1 (made 4 June 2014) updated the application date of the amendments in this Standard to 1 January 2018.

Entities may elect to apply the amendments in this Standard as set out in paragraph 6 of AASB 2010-7.

(m) AASB 2011-7 has been amended by AASB 2012-6 (made 10 September 2012) and AASB 2012-10 (made 18 December 2012).

For-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013. The Standard applies for not-for-profit entities to annual reporting periods beginning on or after 1 January 2014. Not-for-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2013 but before 1 January 2014. If an entity elects to apply this Standard to such annual reporting periods, it shall also apply AASB 10 Consolidated Financial Statements and associated Standards to such periods.

(n) AASB 2011-8 has been amended by AASB 2011-10 (made 5 September 2011) and AASB 2012-6 (made 10 September 2012).

Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013, provided that AASB 13 Fair Value Measurement is also applied to such periods.

(o) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2014, provided that AASB 13 Fair Value Measurement is also applied to such periods.

(p) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 July 2009 but before 1 January 2014, provided that AASB 1053 Application of Tiers of Australian Accounting Standards and AASB 2013-3 Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets are also applied to such periods.

(q) Early application of Part B of this Standard is not permitted.

(r) Entities may elect to apply Part E of this Standard to annual reporting periods ending on or after 31 December 2009 that begin before 1 January 2018, provided that AASB 9 Financial Instruments (2009) or AASB 9 Financial Instruments (2010) is also applied to such periods.

(s) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2018, provided that AASB 15 Revenue from Contracts with Customers is also applied to such periods. AASB 2015-8 updated the application date of the amendments in this Standard (and of AASB 15) to 1 January 2018.

(t) Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2016.

(u) Entities may elect to apply this Standard to annual reporting periods beginning after 24 July 2014 but before 1 January 2018, provided that AASB 9 Financial Instruments (2014) is also applied to such periods.

(v) The amendments made by AASB 2014-5 are no longer required to apply to annual reporting periods beginning on or after 1 January 2017 but before 1 January 2018, as a consequence of AASB 2015-8 deferring the effective date of AASB 15 (and its consequential amendments in AASB 2014-5) from 1 January 2017 to 1 January 2018.

(w) Entities may elect to apply this Standard to annual reporting periods beginning before 1 January 2017.

Table of Amendments to Standard

Paragraph affected	How affected	By … [paragraph]
Aus1.1	amended	AASB 2007-8 [7, 8]
Aus1.4	amended deleted	AASB 2007-8 [8] AASB 2013-9B [37, 38]
Aus 1.8 (preceding heading)	added	AASB 2010-2 [42]
Aus1.8	added amended	AASB 2010-2 [42] AASB 2013-6 [6]
Aus1.9	added	AASB 2010-2 [42]
2	amended amended amended amended amended	AASB 2008-5 [56] AASB 2009-11 [35] AASB 2010-7 [7, 38] AASB 2014-5 [34] AASB 2014-6 [16]
4	amended amended	AASB 2011-7 [49] AASB 2014-7 [46]
5	amended amended amended amended	AASB 2008-5 [56] AASB 2009-11 [35] AASB 2010-7 [7, 38] AASB 2011-8 [68]
Aus5.1	added	AASB 2016-4 [7]
6	amended amended amended	AASB 2007-10 [84] AASB 2008-3 [60] AASB 2011-8 [69]
Aus6.1	deleted	AASB 2016-4 [4]
Aus6.2	amended	AASB 2016-4 [5]
9	amended	AASB 2007-8 [6]
12	amended amended amended	AASB 2008-7 [23] AASB 2011-7 [48] AASB 2011-8 [70]
20	amended	AASB 2011-8 [70]
22	amended	AASB 2011-8 [70]
25-26	deleted	AASB 2011-8 [71]
27	amended deleted	AASB 2007-8 [6] AASB 2011-8 [71]
28	amended amended	AASB 2007-4 [96] AASB 2011-8 [72]
Aus32.1-Aus32.2	deleted	AASB 2016-4 [6]
53A	added	AASB 2011-8 [73]
61	amended	AASB 2007-8 [118]
Aus61.1	amended	AASB 2009-6 [81]
65	amended	AASB 2008-3 [61]
78	amended	AASB 2011-8 [74]
80	amended amended	AASB 2007-3 [14] AASB 2009-5 [18]
81	amended	AASB 2008-3 [62]
85	amended	AASB 2008-3 [62]
91-95 (and preceding heading)	deleted	AASB 2008-3 [63]
105	amended	AASB 2011-8 [74]
110	amended	AASB 2007-8 [6]
111	amended	AASB 2011-8 [74]
120	amended	AASB 2007-8 [118]
Aus120.1	amended	AASB 2009-6 [82]
126	amended	AASB 2007-8 [6, 119]
129	amended amended	AASB 2007-3 [15] AASB 2007-8 [119]
130	amended amended amended	AASB 2007-3 [16] AASB 2011-8 [74] AASB 2013-3 [6]
133	amended	AASB 2007-8 [6]
134	amended amended amended	AASB 2008-5 [56] AASB 2011-8 [74] AASB 2013-3 [6]
138 (preceding heading)	amended amended	AASB 2008-5 [57] AASB 2013-3 [7]
138	amended note amended	AASB 2008-5 [57] AASB 2008-3 [64]
140A	note added	AASB 2007-8 [120]
140B	note added	AASB 2008-3 [65]
140C	added	AASB 2008-5 [58]
140D	added	AASB 2008-7 [24]
140E	added	AASB 2009-5 [19]
140F	added deleted	AASB 2009-11 [35] AASB 2010-7 [7, 38]
140G	added deleted	AASB 2010-7 [38] AASB 2014-1E [91]
140H	added	AASB 2011-7 [49]
140I	added	AASB 2011-8 [75]
140J	added	AASB 2013-3 [8]
140K	added deleted	AASB 2014-1E [91] AASB 2014-7 [46]
140L	added	AASB 2014-5 [34]
140M	added	AASB 2014-7 [46]
Appendix C	added	AASB 2008-3 [66]

Table of Amendments to Illustrative Examples

Paragraph affected	How affected	By … [paragraph]
IE62-IE64 (and preceding headings)	amended	AASB 2008-3 [67]
IE65 (and preceding heading)	amended amended	AASB 2008-3 [67] AASB 2009-7 [13]
IE66-IE68 (and preceding heading)	amended	AASB 2008-3 [67]
IE68A-IE68J (and preceding headings)	added	AASB 2008-3 [68]
IE80	amended	AASB 2007-3 [Appx]
IE89	amended	AASB 2007-10 [84]

General Terminology Amendments

References to ‘fair value less costs to sell’ were amended to ‘fair value less costs of disposal’ by AASB 2011-8, except in relation to AASB 141 Agriculture. These amendments are not shown in the above Tables of Amendments.

Basis for Conclusions on AASB 2016-4

The Basis for Conclusions accompanying AASB 2016-4 Amendments to Australian Accounting Standards – Recoverable Amount of Non-Cash-Generating Specialised Assets of Not-for-Profit Entities is attached to this compiled Standard.

COMPARISON WITH IAS 36

AASB 136 and IAS 36

AASB 136 Impairment of Assets as amended incorporates IAS 36 Impairment of Assets as issued and amended by the International Accounting Standards Board (IASB). Paragraphs that have been added to this Standard (and do not appear in the text of IAS 36) are identified with the prefix “Aus”, followed by the number of the preceding IASB paragraph and decimal numbering. Paragraphs that apply only to not-for-profit entities begin by identifying their limited applicability.

Compliance with IAS 36

For-profit entities that comply with AASB 136 as amended will simultaneously be in compliance with IAS 36 as amended.

Not-for-profit entities using the added “Aus” paragraphs in the Standard that specifically apply to not-for-profit entities may not be simultaneously complying with IAS 36. Whether a not-for-profit entity will be in compliance with IAS 36 will depend on whether the “Aus” paragraphs provide additional guidance for not-for-profit entities or contain requirements that are inconsistent with the corresponding IASB Standard and will be applied by the not-for-profit entity.

Entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements will not be in compliance with IAS 36.

ACCOUNTING STANDARD AASB 136

The Australian Accounting Standards Board made Accounting Standard AASB 136 Impairment of Assets under section 334 of the Corporations Act 2001 on 15 July 2004.

This compiled version of AASB 136 applies to annual reporting periods beginning on or after 1 January 2018. However, for such periods this principal Standard has been superseded by AASB 136 (August 2015), but can be applied early. It incorporates relevant amendments contained in other AASB Standards made by the AASB up to and including 27 June 2016 (see Compilation Details).

ACCOUNTING STANDARD AASB 136

IMPAIRMENT OF ASSETS

Objective

1 The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognise an impairment loss. The Standard also specifies when an entity should reverse an impairment loss and prescribes disclosures.

Application

Aus1.1 This Standard applies to:

(a) each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;

(b) general purpose financial statements of each other reporting entity; and

(c) financial statements that are, or are held out to be, general purpose financial statements.

Aus1.2 This Standard applies to annual reporting periods beginning on or after 1 January 2005.
[Note: For application dates of paragraphs changed or added by an amending Standard, see Compilation Details.]

Aus1.3 This Standard shall not be applied to annual reporting periods beginning before 1 January 2005.

Aus1.4 [Deleted by the AASB]

Aus1.5 When applicable, this Standard supersedes:

(a) AASB 1010 Recoverable Amount of Non-Current Assets as notified in the Commonwealth of Australia Gazette No S 657, 24 December 1999; and

(b) AAS 10 Recoverable Amount of Non-Current Assets as issued in December 1999.

Aus1.6 Both AASB 1010 and AAS 10 remain applicable until superseded by this Standard.

Aus1.7 Notice of this Standard was published in the Commonwealth of Australia Gazette No S 294, 22 July 2004.

Reduced Disclosure Requirements

Aus1.8 The following do not apply to entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements:

(a)paragraphs 129, 130(a)-(d), 130(f)-(g) and 131-137; and

(b)in paragraph 130(e), the text “and whether … value in use”.

Entities applying Australian Accounting Standards – Reduced Disclosure Requirements may elect to comply with some or all of these excluded requirements.

Aus1.9 The requirements that do not apply to entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements are identified in this Standard by shading of the relevant text.

Scope

2 This Standard shall be applied in accounting for the impairment of all assets, other than:

(a) inventories (see AASB 102 Inventories);

(b) contract assets and assets arising from costs to obtain or fulfil a contract that are recognised in accordance with AASB 15 Revenue from Contracts with Customers;

(c) deferred tax assets (see AASB 112 Income Taxes);

(d) assets arising from employee benefits (see AASB 119 Employee Benefits);

(e) financial assets that are within the scope of AASB 9 Financial Instruments;

(f) investment property that is measured at fair value (see AASB 140 Investment Property);

(g) biological assets related to agricultural activity within the scope of AASB 141 Agriculture that are measured at fair value less costs to sell;

(h) deferred acquisition costs, and intangible assets, arising from an insurer’s contractual rights under insurance contracts within the scopes of AASB 4 Insurance Contracts, AASB 1023 General Insurance Contracts and AASB 1038 Life Insurance Contracts; and

(i) non-current assets (or disposal groups) classified as held for sale in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations.

3 This Standard does not apply to inventories, assets arising from construction contracts, deferred tax assets, assets arising from employee benefits, or assets classified as held for sale (or included in a disposal group that is classified as held for sale) because existing Standards applicable to these assets contain requirements for recognising and measuring these assets.

4 This Standard applies to financial assets classified as:

(a) subsidiaries, as defined in AASB 10 Consolidated Financial Statements;

(b) associates, as defined in AASB 128 Investments in Associates and Joint Ventures; and

(c) joint ventures, as defined in AASB 11 Joint Arrangements.

For impairment of other financial assets, refer to AASB 9.

5 This Standard does not apply to financial assets within the scope of AASB 139, investment property measured at fair value within the scope of AASB 140, or biological assets related to agricultural activity measured at fair value less costs to sell within the scope of AASB 141. However, this Standard applies to assets that are carried at revalued amount (i.e. fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses) in accordance with other Australian Accounting Standards, such as the revaluation models in AASB 116 Property, Plant and Equipment and AASB 138 Intangible Assets. The only difference between an asset’s fair value and its fair value less costs of disposal is the direct incremental costs attributable to the disposal of the asset.

(a) If the disposal costs are negligible, the recoverable amount of the revalued asset is necessarily close to, or greater than, its revalued amount. In this case, after the revaluation requirements have been applied, it is unlikely that the revalued asset is impaired and recoverable amount need not be estimated.

(b) [deleted by the IASB]

(c) If the disposal costs are not negligible, the fair value less costs of disposal of the revalued asset is necessarily less than its fair value. Therefore, the revalued asset will be impaired if its value in use is less than its revalued amount. In this case, after the revaluation requirements have been applied, an entity applies this Standard to determine whether the asset may be impaired.

Aus5.1 Many assets of not-for-profit 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. Given that these assets are rarely sold, their cost of disposal is typically negligible. The recoverable amount of such assets is expected to be materially the same as fair value, determined under AASB 13 Fair Value Measurement, with the consequence that this Standard:

(a)does not apply to such assets that are regularly revalued to fair value under the revaluation model in AASB 116 and AASB 138; and

(b)applies to such assets accounted for under the cost model in AASB 116 and AASB 138.

Definitions

6 The following terms are used in this Standard with the meanings specified.

Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.

A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash-generating unit under review and other cash-generating units.

Costs of disposal are incremental costs directly attributable to the disposal of an asset or cash-generating unit, excluding finance costs and income tax expense.

Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.

Depreciation (Amortisation) is the systematic allocation of the depreciable amount of an asset over its useful life.[1]
[1] In the case of an intangible asset, the term ‘amortisation’ is generally used instead of ‘depreciation’. The two terms have the same meaning.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See AASB 13 Fair Value Measurement.)

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 and its value in use.

Useful life is either:

(a) the period of time over which an asset is expected to be used by the entity; or

(b) the number of production or similar units expected to be obtained from the asset by the entity.

Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.

Aus6.1 [Deleted by the AASB]

Aus6.2 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.

Identifying an Asset that may be Impaired

7 Paragraphs 8-17 specify when recoverable amount shall be determined. These requirements use the term ‘an asset’ but apply equally to an individual asset or a cash-generating unit. The remainder of this Standard is structured as follows:

(a) paragraphs 18-57 set out the requirements for measuring recoverable amount. These requirements also use the term ‘an asset’ but apply equally to an individual asset and a cash-generating unit;

(b) paragraphs 58-108 set out the requirements for recognising and measuring impairment losses. Recognition and measurement of impairment losses for individual assets other than goodwill are dealt with in paragraphs 58-64. Paragraphs 65-108 deal with the recognition and measurement of impairment losses for cash-generating units and goodwill;

(c) paragraphs 109-116 set out the requirements for reversing an impairment loss recognised in prior periods for an asset or a cash-generating unit. Again, these requirements use the term ‘an asset’ but apply equally to an individual asset or a cash-generating unit. Additional requirements for an individual asset are set out in paragraphs 117-121, for a cash-generating unit in paragraphs 122 and 123, and for goodwill in paragraphs 124 and 125; and

(d) paragraphs 126-133 specify the information to be disclosed about impairment losses and reversals of impairment losses for assets and cash-generating units. Paragraphs 134-137 specify additional disclosure requirements for cash-generating units to which goodwill or intangible assets with indefinite useful lives have been allocated for impairment testing purposes.

8 An asset is impaired when its carrying amount exceeds its recoverable amount. Paragraphs 12-14 describe some indications that an impairment loss may have occurred. If any of those indications is present, an entity is required to make a formal estimate of recoverable amount. Except as described in paragraph 10, this Standard does not require an entity to make a formal estimate of recoverable amount if no indication of an impairment loss is present.

9 An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.

10 Irrespective of whether there is any indication of impairment, an entity shall also:

(a) test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. This impairment test may be performed at any time during an annual period, provided it is performed at the same time every year. Different intangible assets may be tested for impairment at different times. However, if such an intangible asset was initially recognised during the current annual period, that intangible asset shall be tested for impairment before the end of the current annual period; and

(b) test goodwill acquired in a business combination for impairment annually in accordance with paragraphs 80-99.

11 The ability of an intangible asset to generate sufficient future economic benefits to recover its carrying amount is usually subject to greater uncertainty before the asset is available for use than after it is available for use. Therefore, this Standard requires an entity to test for impairment, at least annually, the carrying amount of an intangible asset that is not yet available for use.

12 In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications:

External sources of information

(a) there are observable indications that the asset’s value has declined during the period significantly more than would be expected as a result of the passage of time or normal use;

(b) significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated;

(c) market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially;

(d) the carrying amount of the net assets of the entity is more than its market capitalisation;

Internal sources of information

(e) evidence is available of obsolescence or physical damage of an asset;

(f) significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite;[2] and
[2] Once an asset meets the criteria to be classified as held for sale (or is included in a disposal group that is classified as held for sale), it is excluded from the scope of this Standard and is accounted for in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations.

(g) evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

Dividend from a subsidiary, joint venture or associate

(h) for an investment in a subsidiary, joint venture or associate, the investor recognises a dividend from the investment and evidence is available that:

(i) the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including associated goodwill; or

(ii) the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the period the dividend is declared.

13 The list in paragraph 12 is not exhaustive. An entity may identify other indications that an asset may be impaired and these would also require the entity to determine the asset’s recoverable amount or, in the case of goodwill, perform an impairment test in accordance with paragraphs 80-99.

14 Evidence from internal reporting that indicates that an asset may be impaired includes the existence of:

(a) cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, that are significantly higher than those originally budgeted;

(b) actual net cash flows or operating profit or loss flowing from the asset that are significantly worse than those budgeted;

(c) a significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss, flowing from the asset; or

(d) operating losses or net cash outflows for the asset, when current period amounts are aggregated with budgeted amounts for the future.

15 As indicated in paragraph 10, this Standard requires an intangible asset with an indefinite useful life or not yet available for use and goodwill to be tested for impairment, at least annually. Apart from when the requirements in paragraph 10 apply, the concept of materiality applies in identifying whether the recoverable amount of an asset needs to be estimated. For example, if previous calculations show that an asset’s recoverable amount is significantly greater than its carrying amount, the entity need not re-estimate the asset’s recoverable amount if no events have occurred that would eliminate that difference. Similarly, previous analysis may show that an asset’s recoverable amount is not sensitive to one (or more) of the indications listed in paragraph 12.

16 As an illustration of paragraph 15, if market interest rates or other market rates of return on investments have increased during the period, an entity is not required to make a formal estimate of an asset’s recoverable amount in the following cases:

(a) if the discount rate used in calculating the asset’s value in use is unlikely to be affected by the increase in these market rates. For example, increases in short-term interest rates may not have a material effect on the discount rate used for an asset that has a long remaining useful life;

(b) if the discount rate used in calculating the asset’s value in use is likely to be affected by the increase in these market rates but previous sensitivity analysis of recoverable amount shows that:

(i) it is unlikely that there will be a material decrease in recoverable amount because future cash flows are also likely to increase (e.g. in some cases, an entity may be able to demonstrate that it adjusts its revenues to compensate for any increase in market rates); or

(ii) the decrease in recoverable amount is unlikely to result in a material impairment loss.

17 If there is an indication that an asset may be impaired, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value for the asset needs to be reviewed and adjusted in accordance with the Standard applicable to the asset, even if no impairment loss is recognised for the asset.

Measuring Recoverable Amount

18 This Standard defines recoverable amount as the higher of an asset’s or cash-generating unit’s fair value less costs of disposal and its value in use. Paragraphs 19-57 set out the requirements for measuring recoverable amount. These requirements use the term ‘an asset’ but apply equally to an individual asset or a cash-generating unit.

19 It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount.

20 It may be possible to measure fair value less costs of disposal, even if there is not a quoted price in an active market for an identical asset. However, sometimes it will not be possible to measure fair value less costs of disposal because there is no basis for making a reliable estimate of the price at which an orderly transaction to sell the asset would take place between market participants at the measurement date under current market conditions. In this case, the entity may use the asset’s value in use as its recoverable amount.

21 If there is no reason to believe that an asset’s value in use materially exceeds its fair value less costs of disposal, the asset’s fair value less costs of disposal may be used as its recoverable amount. This will often be the case for an asset that is held for disposal. This is because the value in use of an asset held for disposal will consist mainly of the net disposal proceeds, as the future cash flows from continuing use of the asset until its disposal are likely to be negligible.

22 Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs (see paragraphs 65-103), unless either:

(a) the asset’s fair value less costs of disposal is higher than its carrying amount; or

(b) the asset’s value in use can be estimated to be close to its fair value less costs of disposal and fair value less costs of disposal can be measured.

23 In some cases, estimates, averages and computational short cuts may provide reasonable approximations of the detailed computations illustrated in this Standard for determining fair value less costs of disposal or value in use.

Measuring the Recoverable Amount of an Intangible Asset with an Indefinite Useful Life

24 Paragraph 10 requires an intangible asset with an indefinite useful life to be tested for impairment annually by comparing its carrying amount with its recoverable amount, irrespective of whether there is any indication that it may be impaired. However, the most recent detailed calculation of such an asset’s recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period, provided all of the following criteria are met:

(a) if the intangible asset does not generate cash inflows from continuing use that are largely independent of those from other assets or groups of assets and is therefore tested for impairment as part of the cash-generating unit to which it belongs, the assets and liabilities making up that unit have not changed significantly since the most recent recoverable amount calculation;

(b) the most recent recoverable amount calculation resulted in an amount that exceeded the asset’s carrying amount by a substantial margin; and

(c) based on an analysis of events that have occurred and circumstances that have changed since the most recent recoverable amount calculation, the likelihood that a current recoverable amount determination would be less than the asset’s carrying amount is remote.

Fair Value less Costs of Disposal

25-27 [Deleted by the IASB]

28 Costs of disposal, other than those that have been recognised as liabilities, are deducted in measuring fair value less costs of disposal. Examples of such costs are legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale. However, termination benefits (as defined in AASB 119) and costs associated with reducing or reorganising a business following the disposal of an asset are not direct incremental costs to dispose of the asset.

29 Sometimes, the disposal of an asset would require the buyer to assume a liability and only a single fair value less costs of disposal is available for both the asset and the liability. Paragraph 78 explains how to deal with such cases.

Value in Use

30 The following elements shall be reflected in the calculation of an asset’s value in use:

(a) an estimate of the future cash flows the entity expects to derive from the asset;

(b) expectations about possible variations in the amount or timing of those future cash flows;

(c) the time value of money, represented by the current market risk-free rate of interest;

(d) the price for bearing the uncertainty inherent in the asset; and

(e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.

31 Estimating the value in use of an asset involves the following steps:

(a) estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal; and

(b) applying the appropriate discount rate to those future cash flows.

32 The elements identified in paragraph 30(b), (d) and (e) can be reflected either as adjustments to the future cash flows or as adjustments to the discount rate. Whichever approach an entity adopts to reflect expectations about possible variations in the amount or timing of future cash flows, the result shall be to reflect the expected present value of the future cash flows, that is the weighted average of all possible outcomes. The Appendix provides additional guidance on the use of present value techniques in measuring an asset’s value in use.

Basis for Estimates of Future Cash Flows

33 In measuring value in use an entity shall:

(a) base cash flow projections on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Greater weight shall be given to external evidence;

(b) base cash flow projections on the most recent financial budgets/forecasts approved by management, but shall exclude any estimated future cash inflows or outflows expected to arise from future restructurings or from improving or enhancing the asset’s performance. Projections based on these budgets/forecasts shall cover a maximum period of five years, unless a longer period can be justified; and

(c) estimate cash flow projections beyond the period covered by the most recent budgets/forecasts by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified. This growth rate shall not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used, unless a higher rate can be justified.

34 Management assesses the reasonableness of the assumptions on which its current cash flow projections are based by examining the causes of differences between past cash flow projections and actual cash flows. Management shall ensure that the assumptions on which its current cash flow projections are based are consistent with past actual outcomes, provided the effects of subsequent events or circumstances that did not exist when those actual cash flows were generated make this appropriate.

35 Detailed, explicit and reliable financial budgets/forecasts of future cash flows for periods longer than five years are generally not available. For this reason, management’s estimates of future cash flows are based on the most recent budgets/forecasts for a maximum of five years. Management may use cash flow projections based on financial budgets/forecasts over a period longer than five years if it is confident that these projections are reliable and it can demonstrate its ability, based on past experience, to forecast cash flows accurately over that longer period.

36 Cash flow projections until the end of an asset’s useful life are estimated by extrapolating the cash flow projections based on the financial budgets/forecasts using a growth rate for subsequent years. This rate is steady or declining, unless an increase in the rate matches objective information about patterns over a product or industry lifecycle. If appropriate, the growth rate is zero or negative.

37 When conditions are favourable, competitors are likely to enter the market and restrict growth. Therefore, entities will have difficulty in exceeding the average historical growth rate over the long term (say, twenty years) for the products, industries, or country or countries in which the entity operates, or for the market in which the asset is used.

38 In using information from financial budgets/forecasts, an entity considers whether the information reflects reasonable and supportable assumptions and represents management’s best estimate of the set of economic conditions that will exist over the remaining useful life of the asset.

Composition of Estimates of Future Cash Flows

39 Estimates of future cash flows shall include:

(a) projections of cash inflows from the continuing use of the asset;

(b) projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing use of the asset (including cash outflows to prepare the asset for use) and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset; and

(c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.

40 Estimates of future cash flows and the discount rate reflect consistent assumptions about price increases attributable to general inflation. Therefore, if the discount rate includes the effect of price increases attributable to general inflation, future cash flows are estimated in nominal terms. If the discount rate excludes the effect of price increases attributable to general inflation, future cash flows are estimated in real terms (but include future specific price increases or decreases).

41 Projections of cash outflows include those for the day-to-day servicing of the asset as well as future overheads that can be attributed directly, or allocated on a reasonable and consistent basis, to the use of the asset.

42 When the carrying amount of an asset does not yet include all the cash outflows to be incurred before it is ready for use or sale, the estimate of future cash outflows includes an estimate of any further cash outflow that is expected to be incurred before the asset is ready for use or sale. For example, this is the case for a building under construction or for a development project that is not yet completed.

43 To avoid double-counting, estimates of future cash flows do not include:

(a) cash inflows from assets that generate cash inflows that are largely independent of the cash inflows from the asset under review (e.g. financial assets such as receivables); and

(b) cash outflows that relate to obligations that have been recognised as liabilities (e.g. payables, pensions or provisions).

44 Future cash flows shall be estimated for the asset in its current condition. Estimates of future cash flows shall not include estimated future cash inflows or outflows that are expected to arise from:

(a) a future restructuring to which an entity is not yet committed; or

(b) improving or enhancing the asset’s performance.

45 Because future cash flows are estimated for the asset in its current condition, value in use does not reflect:

(a) future cash outflows or related cost savings (e.g. reductions in staff costs) or benefits that are expected to arise from a future restructuring to which an entity is not yet committed; or

(b) future cash outflows that will improve or enhance the asset’s performance or the related cash inflows that are expected to arise from such outflows.

46 A restructuring is a programme that is planned and controlled by management and materially changes either the scope of the business undertaken by an entity or the manner in which the business is conducted. AASB 137 Provisions, Contingent Liabilities and Contingent Assets contains guidance clarifying when an entity is committed to a restructuring.

47 When an entity becomes committed to a restructuring, some assets are likely to be affected by this restructuring. Once the entity is committed to the restructuring:

(a) its estimates of future cash inflows and cash outflows for the purpose of determining value in use reflect the cost savings and other benefits from the restructuring (based on the most recent financial budgets/forecasts approved by management); and

(b) its estimates of future cash outflows for the restructuring are included in a restructuring provision in accordance with AASB 137.

Illustrative Example 5 illustrates the effect of a future restructuring on a value in use calculation.

48 Until an entity incurs cash outflows that improve or enhance the asset’s performance, estimates of future cash flows do not include the estimated future cash inflows that are expected to arise from the increase in economic benefits associated with the cash outflow (see Illustrative Example 6).

49 Estimates of future cash flows include future cash outflows necessary to maintain the level of economic benefits expected to arise from the asset in its current condition. When a cash-generating unit consists of assets with different estimated useful lives, all of which are essential to the ongoing operation of the unit, the replacement of assets with shorter lives is considered to be part of the day-to-day servicing of the unit when estimating the future cash flows associated with the unit. Similarly, when a single asset consists of components with different estimated useful lives, the replacement of components with shorter lives is considered to be part of the day-to-day servicing of the asset when estimating the future cash flows generated by the asset.

50 Estimates of future cash flows shall not include:

(a) cash inflows or outflows from financing activities; or

(b) income tax receipts or payments.

51 Estimated future cash flows reflect assumptions that are consistent with the way the discount rate is determined. Otherwise, the effect of some assumptions will be counted twice or ignored. Because the time value of money is considered by discounting the estimated future cash flows, these cash flows exclude cash inflows or outflows from financing activities. Similarly, because the discount rate is determined on a pre-tax basis, future cash flows are also estimated on a pre-tax basis.

52 The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life shall be the amount that an entity expects to obtain from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the estimated costs of disposal.

53 The estimate of net cash flows to be received (or paid) for the disposal of an asset at the end of its useful life is determined in a similar way to an asset’s fair value less costs of disposal, except that, in estimating those net cash flows:

(a) an entity uses prices prevailing at the date of the estimate for similar assets that have reached the end of their useful life and have operated under conditions similar to those in which the asset will be used; and

(b) the entity adjusts those prices for the effect of both future price increases due to general inflation and specific future price increases or decreases. However, if estimates of future cash flows from the asset’s continuing use and the discount rate exclude the effect of general inflation, the entity also excludes this effect from the estimate of net cash flows on disposal.

53A Fair value differs from value in use. Fair value reflects the assumptions market participants would use when pricing the asset. In contrast, value in use reflects the effects of factors that may be specific to the entity and not applicable to entities in general. For example, fair value does not reflect any of the following factors to the extent that they would not be generally available to market participants:

(a) additional value derived from the grouping of assets (such as the creation of a portfolio of investment properties in different locations);

(b) synergies between the asset being measured and other assets;

(c) legal rights or legal restrictions that are specific only to the current owner of the asset; and

(d) tax benefits or tax burdens that are specific to the current owner of the asset.

Foreign Currency Future Cash Flows

54 Future cash flows are estimated in the currency in which they will be generated and then discounted using a discount rate appropriate for that currency. An entity translates the present value using the spot exchange rate at the date of the value in use calculation.

Discount Rate

55 The discount rate (rates) shall be a pre-tax rate (rates) that reflect(s) current market assessments of:

(a) the time value of money; and

(b) the risks specific to the asset for which the future cash flow estimates have not been adjusted.

56 A rate that reflects current market assessments of the time value of money and the risks specific to the asset is the return that investors would require if they were to choose an investment that would generate cash flows of amounts, timing and risk profile equivalent to those that the entity expects to derive from the asset. This rate is estimated from the rate implicit in current market transactions for similar assets or from the weighted average cost of capital of a listed entity that has a single asset (or a portfolio of assets) similar in terms of service potential and risks to the asset under review. However, the discount rate(s) used to measure an asset’s value in use shall not reflect risks for which the future cash flow estimates have been adjusted. Otherwise, the effect of some assumptions will be double-counted.

57 When an asset-specific rate is not directly available from the market, an entity uses surrogates to estimate the discount rate. The Appendix provides additional guidance on estimating the discount rate in such circumstances.

Recognising and Measuring an Impairment Loss

58 Paragraphs 59-64 set out the requirements for recognising and measuring impairment losses for an individual asset other than goodwill. Recognising and measuring impairment losses for cash-generating units and goodwill are dealt with in paragraphs 65-108.

59 If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.

60 An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard (e.g. in accordance with the revaluation model in AASB 116). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other Standard.

61 An impairment loss on a non-revalued asset is recognised in profit or loss. However, an impairment loss on a revalued asset is recognised in other comprehensive income to the extent that the impairment loss does not exceed the amount in the revaluation surplus for that same asset. Such an impairment loss on a revalued asset reduces the revaluation surplus for that asset.

Aus61.1 Notwithstanding paragraph 61, in respect of not-for-profit entities, an impairment loss on a revalued asset is recognised in other comprehensive income to the extent that the impairment loss does not exceed the amount in the revaluation surplus for the class of asset. Such an impairment loss on a revalued asset reduces the revaluation surplus for the class of asset.

62 When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an entity shall recognise a liability if, and only if, that is required by another Standard.

63 After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

64 If an impairment loss is recognised, any related deferred tax assets or liabilities are determined in accordance with AASB 112 by comparing the revised carrying amount of the asset with its tax base (see Illustrative Example 3).

Cash-generating Units and Goodwill

65 Paragraphs 66-108 and Appendix C set out the requirements for identifying the cash-generating unit to which an asset belongs and determining the carrying amount of, and recognising impairment losses for, cash-generating units and goodwill.

Identifying the Cash-generating Unit to Which an Asset Belongs

66 If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash-generating unit to which the asset belongs (the asset’s cash-generating unit).

67 The recoverable amount of an individual asset cannot be determined if:

(a) the asset’s value in use cannot be estimated to be close to its fair value less costs of disposal (e.g. when the future cash flows from continuing use of the asset cannot be estimated to be negligible); and

(b) the asset does not generate cash inflows that are largely independent of those from other assets.

In such cases, value in use and, therefore, recoverable amount, can be determined only for the asset’s cash-generating unit.

Example

A mining entity owns a private railway to support its mining activities. The private railway could be sold only for scrap value and it does not generate cash inflows that are largely independent of the cash inflows from the other assets of the mine.

It is not possible to estimate the recoverable amount of the private railway because its value in use cannot be determined and is probably different from scrap value. Therefore, the entity estimates the recoverable amount of the cash-generating unit to which the private railway belongs, that is, the mine as a whole.

68 As defined in paragraph 6, an asset’s cash-generating unit is the smallest group of assets that includes the asset and generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Identification of an asset’s cash-generating unit involves judgement. If recoverable amount cannot be determined for an individual asset, an entity identifies the lowest aggregation of assets that generate largely independent cash inflows.

Example

A bus company provides services under contract with a municipality that requires minimum service on each of five separate routes. Assets devoted to each route and the cash flows from each route can be identified separately. One of the routes operates at a significant loss.

Because the entity does not have the option to curtail any one bus route, the lowest level of identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets is the cash inflows generated by the five routes together. The cash-generating unit for each route is the bus company as a whole.

69 Cash inflows are inflows of cash and cash equivalents received from parties external to the entity. In identifying whether cash inflows from an asset (or group of assets) are largely independent of the cash inflows from other assets (or groups of assets), an entity considers various factors including how management monitors the entity’s operations (such as by product lines, businesses, individual locations, districts or regional areas) or how management makes decisions about continuing or disposing of the entity’s assets and operations. Illustrative Example 1 gives examples of identification of a cash-generating unit.

70 If an active market exists for the output produced by an asset or group of assets, that asset or group of assets shall be identified as a cash-generating unit, even if some or all of the output is used internally. If the cash inflows generated by any asset or cash-generating unit are affected by internal transfer pricing, an entity shall use management’s best estimate of future price(s) that could be achieved in arm’s length transactions in estimating:

(a) the future cash inflows used to determine the asset’s or cash-generating unit’s value in use; and

(b) the future cash outflows used to determine the value in use of any other assets or cash-generating units that are affected by the internal transfer pricing.

71 Even if part or all of the output produced by an asset or a group of assets is used by other units of the entity (e.g. products at an intermediate stage of a production process), this asset or group of assets forms a separate cash-generating unit if the entity could sell the output on an active market. This is because the asset or group of assets could generate cash inflows that would be largely independent of the cash inflows from other assets or groups of assets. In using information based on financial budgets/forecasts that relates to such a cash-generating unit, or to any other asset or cash-generating unit affected by internal transfer pricing, an entity adjusts this information if internal transfer prices do not reflect management’s best estimate of future prices that could be achieved in arm’s length transactions.

72 Cash-generating units shall be identified consistently from period to period for the same asset or types of assets, unless a change is justified.

73 If an entity determines that an asset belongs to a cash-generating unit different from that in previous periods, or that the types of assets aggregated for the asset’s cash-generating unit have changed, paragraph 130 requires disclosures about the cash-generating unit, if an impairment loss is recognised or reversed for the cash-generating unit.

Recoverable Amount and Carrying Amount of a Cash-generating Unit

74 The recoverable amount of a cash-generating unit is the higher of the cash-generating unit’s fair value less costs of disposal and its value in use. For the purpose of determining the recoverable amount of a cash-generating unit, any reference in paragraphs 19-57 to ‘an asset’ is read as a reference to ‘a cash-generating unit’.

75 The carrying amount of a cash-generating unit shall be determined on a basis consistent with the way the recoverable amount of the cash-generating unit is determined.

76 The carrying amount of a cash-generating unit:

(a) includes the carrying amount of only those assets that can be attributed directly, or allocated on a reasonable and consistent basis, to the cash-generating unit and will generate the future cash inflows used in determining the cash-generating unit’s value in use; and

(b) does not include the carrying amount of any recognised liability, unless the recoverable amount of the cash-generating unit cannot be determined without consideration of this liability.

This is because fair value less costs of disposal and value in use of a cash-generating unit are determined excluding cash flows that relate to assets that are not part of the cash-generating unit and liabilities that have been recognised (see paragraphs 28 and 43).

77 When assets are grouped for recoverability assessments, it is important to include in the cash-generating unit all assets that generate or are used to generate the relevant stream of cash inflows. Otherwise, the cash-generating unit may appear to be fully recoverable when in fact an impairment loss has occurred. In some cases, although some assets contribute to the estimated future cash flows of a cash-generating unit, they cannot be allocated to the cash-generating unit on a reasonable and consistent basis. This might be the case for goodwill or corporate assets such as head office assets. Paragraphs 80-103 explain how to deal with these assets in testing a cash-generating unit for impairment.

78 It may be necessary to consider some recognised liabilities to determine the recoverable amount of a cash-generating unit. This may occur if the disposal of a cash-generating unit would require the buyer to assume the liability. In this case, the fair value less costs of disposal (or the estimated cash flow from ultimate disposal) of the cash-generating unit is the price to sell the assets of the cash-generating unit and the liability together, less the costs of disposal. To perform a meaningful comparison between the carrying amount of the cash-generating unit and its recoverable amount, the carrying amount of the liability is deducted in determining both the cash-generating unit’s value in use and its carrying amount.

Example

A company operates a mine in a country where legislation requires that the owner must restore the site on completion of its mining operations. The cost of restoration includes the replacement of the overburden, which must be removed before mining operations commence. A provision for the costs to replace the overburden was recognised as soon as the overburden was removed. The amount provided was recognised as part of the cost of the mine and is being depreciated over the mine’s useful life. The carrying amount of the provision for restoration costs is CU500,[3] which is equal to the present value of the restoration costs.

[3] In this Standard, monetary amounts are denominated in ‘currency units’ (CU).

The entity is testing the mine for impairment. The cash-generating unit for the mine is the mine as a whole. The entity has received various offers to buy the mine at a price of around CU800. This price reflects the fact that the buyer will assume the obligation to restore the overburden. Disposal costs for the mine are negligible. The value in use of the mine is approximately CU1,200, excluding restoration costs. The carrying amount of the mine is CU1,000.

The cash-generating unit’s fair value less costs of disposal is CU800. This amount considers restoration costs that have already been provided for. As a consequence, the value in use for the cash-generating unit is determined after consideration of the restoration costs and is estimated to be CU700 (CU1,200 less CU500). The carrying amount of the cash-generating unit is CU500, which is the carrying amount of the mine (CU1,000) less the carrying amount of the provision for restoration costs (CU500). Therefore, the recoverable amount of the cash-generating unit exceeds its carrying amount.

79 For practical reasons, the recoverable amount of a cash-generating unit is sometimes determined after consideration of assets that are not part of the cash-generating unit (e.g. receivables or other financial assets) or liabilities that have been recognised (e.g. payables, pensions and other provisions). In such cases, the carrying amount of the cash-generating unit is increased by the carrying amount of those assets and decreased by the carrying amount of those liabilities.

Goodwill

Allocating Goodwill to Cash-generating Units

80 For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer’s cash-generating units, or groups of cash-generating units, that is 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. Each unit or group of units to which the goodwill is so allocated shall:

(a) represent the lowest level within the entity at which the goodwill is monitored for internal management purposes; and

(b) not be larger than an operating segment as defined by paragraph 5 of AASB 8 Operating Segments before aggregation.

81 Goodwill recognised in a business combination is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognised. Goodwill does not generate cash flows independently of other assets or groups of assets, and often contributes to the cash flows of multiple cash-generating units. Goodwill sometimes cannot be allocated on a non-arbitrary basis to individual cash-generating units, but only to groups of cash-generating units. As a result, the lowest level within the entity at which the goodwill is monitored for internal management purposes sometimes comprises a number of cash-generating units to which the goodwill relates, but to which it cannot be allocated. References in paragraphs 83-99 and Appendix C to a cash-generating unit to which goodwill is allocated should be read as references also to a group of cash-generating units to which goodwill is allocated.

82 Applying the requirements in paragraph 80 results in goodwill being tested for impairment at a level that reflects the way an entity manages its operations and with which the goodwill would naturally be associated. Therefore, the development of additional reporting systems is typically not necessary.

83 A cash-generating unit to which goodwill is allocated for the purpose of impairment testing may not coincide with the level at which goodwill is allocated in accordance with AASB 121 The Effects of Changes in Foreign Exchange Rates for the purpose of measuring foreign currency gains and losses. For example, if an entity is required by AASB 121 to allocate goodwill to relatively low levels for the purpose of measuring foreign currency gains and losses, it is not required to test the goodwill for impairment at that same level unless it also monitors the goodwill at that level for internal management purposes.

84 If the initial allocation of goodwill acquired in a business combination cannot be completed before the end of the annual period in which the business combination is effected, that initial allocation shall be completed before the end of the first annual period beginning after the acquisition date.

85 In accordance with AASB 3 Business Combinations, if the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is effected, the acquirer:

(a) accounts for the combination using those provisional values; and

(b) recognises any adjustments to those provisional values as a result of completing the initial accounting within the measurement period, which shall not exceed twelve months from the acquisition date.

In such circumstances, it might also not be possible to complete the initial allocation of the goodwill recognised in the combination before the end of the annual period in which the combination is effected. When this is the case, the entity discloses the information required by paragraph 133.

86 If goodwill has been allocated to a cash-generating unit and the entity disposes of an operation within that unit, the goodwill associated with the operation disposed of shall be:

(a) included in the carrying amount of the operation when determining the gain or loss on disposal; and

(b) measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained, unless the entity can demonstrate that some other method better reflects the goodwill associated with the operation disposed of.

Example

An entity sells for CU100 an operation that was part of a cash-generating unit to which goodwill has been allocated. The goodwill allocated to the unit cannot be identified or associated with an asset group at a level lower than that unit, except arbitrarily. The recoverable amount of the portion of the cash-generating unit retained is CU300.

Because the goodwill allocated to the cash-generating unit cannot be non-arbitrarily identified or associated with an asset group at a level lower than that unit, the goodwill associated with the operation disposed of is measured on the basis of the relative values of the operation disposed of and the portion of the unit retained. Therefore, 25 per cent of the goodwill allocated to the cash-generating unit is included in the carrying amount of the operation that is sold.

87 If an entity reorganises its reporting structure in a way that changes the composition of one or more cash-generating units to which goodwill has been allocated, the goodwill shall be reallocated to the units affected. This reallocation shall be performed using a relative value approach similar to that used when an entity disposes of an operation within a cash-generating unit, unless the entity can demonstrate that some other method better reflects the goodwill associated with the reorganised units.

Example

Goodwill had previously been allocated to cash-generating unit A. The goodwill allocated to A cannot be identified or associated with an asset group at a level lower than A, except arbitrarily. A is to be divided and integrated into three other cash-generating units, B, C and D.

Because the goodwill allocated to A cannot be non-arbitrarily identified or associated with an asset group at a level lower than A, it is reallocated to units B, C and D on the basis of the relative values of the three portions of A before those portions are integrated with B, C and D.

Testing Cash-generating Units with Goodwill for Impairment

88 When, as described in paragraph 81, goodwill relates to a cash-generating unit but has not been allocated to that unit, the unit shall be tested for impairment, whenever there is an indication that the unit may be impaired, by comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount. Any impairment loss shall be recognised in accordance with paragraph 104.

89 If a cash-generating unit described in paragraph 88 includes in its carrying amount an intangible asset that has an indefinite useful life or is not yet available for use and that asset can be tested for impairment only as part of the cash-generating unit, paragraph 10 requires the unit also to be tested for impairment annually.

90 A cash-generating unit to which goodwill has been allocated shall be tested for impairment annually, and whenever there is an indication that the unit may be impaired, by comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit. If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit shall be regarded as not impaired. If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity shall recognise the impairment loss in accordance with paragraph 104.

91-95 [Deleted by the IASB]

Timing of Impairment Tests

96 The annual impairment test for a cash-generating unit to which goodwill has been allocated may be performed at any time during an annual period, provided the test is performed at the same time every year. Different cash-generating units may be tested for impairment at different times. However, if some or all of the goodwill allocated to a cash-generating unit was acquired in a business combination during the current annual period, that unit shall be tested for impairment before the end of the current annual period.

97 If the assets constituting the cash-generating unit to which goodwill has been allocated are tested for impairment at the same time as the unit containing the goodwill, they shall be tested for impairment before the unit containing the goodwill. Similarly, if the cash-generating units constituting a group of cash-generating units to which goodwill has been allocated are tested for impairment at the same time as the group of units containing the goodwill, the individual units shall be tested for impairment before the group of units containing the goodwill.

98 At the time of impairment testing a cash-generating unit to which goodwill has been allocated, there may be an indication of an impairment of an asset within the unit containing the goodwill. In such circumstances, the entity tests the asset for impairment first, and recognises any impairment loss for that asset before testing for impairment the cash-generating unit containing the goodwill. Similarly, there may be an indication of an impairment of a cash-generating unit within a group of units containing the goodwill. In such circumstances, the entity tests the cash-generating unit for impairment first, and recognises any impairment loss for that unit, before testing for impairment the group of units to which the goodwill is allocated.

99 The most recent detailed calculation made in a preceding period of the recoverable amount of a cash-generating unit to which goodwill has been allocated may be used in the impairment test of that unit in the current period provided all of the following criteria are met:

IE82 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:

Goodwill
CU Intangible assets with indefinite useful lives
CU

A 350

B 450

C 3,000 1,000

XYZ 1,200

Total 5,000 1,000

IE83 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 (i.e. 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:

Units A and B Unit C Operation XYZ

Gross margin during the budget period (budget period is 4 years)

5-year US government bond rate during the budget period (budget period is 5 years)

Gross margin during the budget period (budget period is 5 years)

Raw materials price inflation during the budget period

Raw materials price inflation during the budget period

Japanese yen/US dollar exchange rate during the budget period

Market share during the budget period

Market share during the budget period

Market share during the budget period

Growth rate used to extrapolate cash flows beyond the budget period

Growth rate used to extrapolate cash flows beyond the budget period

Growth rate used to extrapolate cash flows beyond the budget period

IE84 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.

IE85 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; and

(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.

IE86 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.

IE87 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.

IE88 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.

IE89 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.

Operation XYZ	Unit C	Units A and B (in aggregate)
Carrying amount of goodwill	CU1,200	CU3,000	CU800
Carrying amount of brand name with indefinite useful life	–	CU1,000	–
Key assumptions used in value in use calculations *
· Key assumption · Basis for determining value(s) assigned to key assumption	· Budgeted gross margins · Average gross margins achieved in period immediately before the budget period, increased for expected efficiency improvements. · Values assigned to key assumption reflect past experience, except for efficiency improvements. Management believes improvements of 5% per year are reasonably achievable.	· 5-year US government bond rate · Yield on 5-year US government bonds at the beginning of the budget period. · Value assigned to key assumption is consistent with external sources of information.	· Budgeted gross margins · Average gross margins achieved in period immediately before the budget period, increased for expected efficiency improvements. · Values assigned to key assumption reflect past experience, except for efficiency improvements. Management believes improvements of 5% per year are reasonably achievable.
· Key assumption · Basis for determining value(s) assigned to key assumption	· Japanese yen/US dollar exchange rate during the budget period · Average market forward exchange rate over the budget period. · Value assigned to key assumption is consistent with external sources of information.	· Raw materials price inflation · Forecast consumer price indices during the budget period for North American countries from which raw materials are purchased. · Value assigned to key assumption is consistent with external sources of information.	· Raw materials price inflation · Forecast consumer price indices during the budget period for European countries from which raw materials are purchased. · Value assigned to key assumption is consistent with external sources of information.
· Key assumption	· Budgeted market share	· Budgeted market share
· Basis for determining value(s) assigned to key assumption	· Average market share in period immediately before the budget period.	· Average market share in period immediately before the budget period, increased each year for anticipated growth in market share.
· Value assigned to key assumption reflects past experience. No change in market share expected as a result of ongoing product	· Management believes market share growth of 6% per year is reasonably achievable due to increased advertising expenditure, the benefit from the
quality improvements coupled with anticipated increase in competition.	protection of the 10-year patent on C’s primary product, and the expected synergies to be achieved from operating C as part of M’s North American segment.

* The key assumptions shown in this table for units A and B are only those that are used in the recoverable amount calculations for both units.

DELETED IAS 36 TEXT

Deleted IAS 36 text is not part of AASB 136.

Paragraph 139

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.

Paragraph 140

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.

Paragraph 140A

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.

Paragraph 140B

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 141

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.

BC1This 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.

Background

BC2Under 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.

BC3Paragraph 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”.

BC4The 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.

The need to issue AASB 2016-4

BC5Clarifications 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.

BC6Some 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.

BC7Other 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.

BC8Further 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.

BC9Comments 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.

BC10Some valuers participating in staff outreach noted:

(a)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;

(b)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

(c)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’s initial deliberations

BC11The 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.

BC12The 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:

(a)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;

(b)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

(c)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.

BC13The 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.

BC14The 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.

BC15The 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.

BC16The 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

BC17The AASB published ED 269 Recoverable Amount of Non-cash-generating Specialised Assets of Not-for-Profit Entities proposing that:

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

(b)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.

BC18The 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.

BC19The 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.

Redeliberation of ED 269 proposals

BC20The 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

BC21Some 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:

(a)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

(b)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.

BC22The 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.

BC23The 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.

BC24Some 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

BC25Some 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.

BC26The 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.

BC27The 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.

BC28The 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

BC29Some 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.

BC30Some 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.

BC31The 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.

BC32The 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.

BC33The AASB decided to proceed with the ED 269 proposals with amendments based on the conclusion noted in paragraph BC31.

BC34The 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.

Goodwill CU	Intangible assets with indefinite useful lives CU
A	350
B	450
C	3,000	1,000
XYZ	1,200
Total	5,000	1,000

Units A and B	Unit C	Operation XYZ
Gross margin during the budget period (budget period is 4 years)	5-year US government bond rate during the budget period (budget period is 5 years)	Gross margin during the budget period (budget period is 5 years)
Raw materials price inflation during the budget period	Raw materials price inflation during the budget period	Japanese yen/US dollar exchange rate during the budget period
Market share during the budget period	Market share during the budget period	Market share during the budget period
Growth rate used to extrapolate cash flows beyond the budget period	Growth rate used to extrapolate cash flows beyond the budget period	Growth rate used to extrapolate cash flows beyond the budget period