Accounting Standard AASB 2022-10 Amendments to Australian Accounting Standards – Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities (Cth)

AASB Standard

AASB 2022-10

December 2022

Amendments to Australian Accounting Standards – Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities

[AASB 13]

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ISSN 1036-4803

Contents

PREFACE

ACCOUNTING STANDARD

AASB 2022-10 AMENDMENTS TO AUSTRALIAN ACCOUNTING STANDARDS – FAIR VALUE MEASUREMENT OF NON-FINANCIAL ASSETS OF NOT-FOR-PROFIT PUBLIC SECTOR ENTITIES

from paragraph

OBJECTIVE             1

APPLICATION             2

AMENDMENTS TO AASB 13             5

COMMENCEMENT OF THE LEGISLATIVE INSTRUMENT             9

APPENDIX

F Australian implementation guidance for not-for-profit public sector entities

Australian illustrative examples for not-for-profit public sector entities

BASIS FOR CONCLUSIONS

Australian Accounting Standard AASB 2022-10 Amendments to Australian Accounting Standards – Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities is set out in paragraphs 1 – 9. All the paragraphs have equal authority.

Preface

Standards amended by AASB 2022-10

This Standard makes amendments to AASB 13 Fair Value Measurement (August 2015) for application by not-for-profit public sector entities.

Main features of this Standard

Main requirements

This Standard amends AASB 13, including adding authoritative implementation guidance and providing related illustrative examples, for fair value measurements of non-financial assets of not-for-profit public sector entities not held primarily for their ability to generate net cash inflows. Specifically, for such an asset, this Standard:

(a)specifies that the entity is required to consider whether the asset’s highest and best use differs from its current use only when, at the measurement date, it is:

(i)              classified as held for sale or held for distribution to owners in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations; or

(ii)             highly probable that the asset will be used for an alternative purpose to its current use;

(b)clarifies that the asset’s use is ‘financially feasible’ if market participants would be willing to invest in the asset’s service capacity, considering both the capability of the asset to be used to provide needed goods or services to beneficiaries and the resulting cost of those goods or services;

(c)specifies that, if both the market selling price of a comparable asset and some market participant data required to measure the fair value of the asset are not observable, an entity uses its own assumptions as a starting point in developing unobservable inputs and adjusts those assumptions to the extent that reasonably available information indicates that other market participants (including, but not limited to, other not-for-profit public sector entities) would use different data; and

(d)provides guidance on how the cost approach is to be applied to measure the asset’s fair value, including guidance on the nature of costs to include in the replacement cost of a reference asset and on the identification of economic obsolescence.

Application date

This Standard applies prospectively to annual periods beginning on or after 1 January 2024, with earlier application permitted.

Accounting Standard AASB 2022-10

The Australian Accounting Standards Board makes Accounting Standard AASB 2022-10 Amendments to Australian Accounting Standards – Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities under section 334 of the Corporations Act 2001.

Keith Kendall

Dated 15 December 2022   Chair – AASB

Accounting Standard AASB 2022-10

Amendments to Australian Accounting Standards – Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities

Objective

1. This Standard amends AASB 13 Fair Value Measurement (August 2015), including adding authoritative implementation guidance and providing related illustrative examples, for application by not-for-profit public sector entities.

Application

1. The amendments set out in this Standard apply to entities and financial statements in accordance with the application of AASB 13 set out in AASB 1057 Application of Australian Accounting Standards.

1. This Standard applies to annual periods beginning on or after 1 January 2024. This Standard may be applied to annual periods beginning before 1 January 2024.

1. This Standard uses underlining, striking out and other typographical material to identify some of the amendments to a Standard, in order to make the amendments more understandable. However, the amendments made by this Standard do not include that underlining, striking out or other typographical material. Amended paragraphs are shown with deleted text struck through and new text underlined. Ellipses (…) are used to help provide the context within which amendments are made and also to indicate text that is not amended.

Amendments to AASB 13

1. Paragraphs Aus28.1, Aus29.1, Aus29.2 and Aus93.2 are added. Paragraphs 28, 29 and 93 are not amended but are included for reference.

Highest and best use for non-financial assets

…

28             The highest and best use of a non-financial asset takes into account the use of the asset that is physically possible, legally permissible and financially feasible, as follows:

(a)            …

(c)             A use that is financially feasible takes into account whether a use of the asset that is physically possible and legally permissible generates adequate income or cash flows (taking into account the costs of converting the asset to that use) to produce an investment return that market participants would require from an investment in that asset put to that use.

Aus28.1Notwithstanding paragraph 28(c), for a non-financial asset of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows, an asset’s use is financially feasible if market participants (including, but not limited to, other not-for-profit public sector entities) would be willing to invest in the asset’s service capacity, considering both the capability of the asset to be used to provide needed goods or services to beneficiaries and the resulting cost of those goods or services.

29             Highest and best use is determined from the perspective of market participants, even if the entity intends a different use. However, an entity’s current use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximise the value of the asset.

Aus29.1Notwithstanding paragraph 29, a not-for-profit public sector entity is required to consider whether, for a non-financial asset not held primarily for its ability to generate net cash inflows, the asset’s highest and best use differs from its current use only when, at the measurement date, it is:

(a)classified as held for sale or held for distribution to owners in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations; or

(b)highly probable that the asset will be used for an alternative purpose to its current use, in accordance with paragraph Aus29.2.

Aus29.2For the purposes of paragraph Aus29.1(b), it is highly probable that the asset will be used for an alternative purpose to its current use when, at the measurement date, all the following conditions are met:

(a)the alternative purpose for the asset is physically possible, legally permissible and financially feasible in accordance with paragraphs 28 and Aus28.1;

(b)the appropriate level of management is committed to a plan to change the use of the asset to that alternative purpose, and an active programme to complete the plan has been initiated;

(c)any approvals required to change the asset’s use have been obtained; and

(d)based on reasonably available information, it is highly probable that the current use of the asset will cease under the plan within one year.

…

Disclosure

…

93             To meet the objectives in paragraph 91, an entity shall disclose, at a minimum, the following information for each class of assets and liabilities (see paragraph 94 for information on determining appropriate classes of assets and liabilities) measured at fair value (including measurements based on fair value within the scope of this Standard) in the statement of financial position after initial recognition:

(a)            …

(i)              for recurring and non-recurring fair value measurements, if the highest and best use of a non-financial asset differs from its current use, an entity shall disclose that fact and why the non-financial asset is being used in a manner that differs from its highest and best use.

…

Aus93.2For a non-financial asset of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows, the information in paragraph 93(i) is required to be disclosed only if the entity has determined that the asset’s highest and best use differs from its current use. Such an entity is required to consider whether this difference exists only when, in accordance with paragraphs Aus29.1 and Aus29.2, at the measurement date, the asset is classified as held for sale or held for distribution to owners in accordance with AASB 5 or it is highly probable that the asset will be used for an alternative purpose to its current use.

1. Paragraph AusC6.1 is added to Appendix C Effective date and transition.

AusC6.1AASB 2022-10 Amendments to Australian Accounting Standards – Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities amended AASB 13 for application by not-for-profit public sector entities, including adding Appendix F Australian implementation guidance for not-for-profit public sector entities. A not-for-profit public sector entity shall apply those amendments prospectively for annual periods beginning on or after 1 January 2024. Earlier application is permitted. If an entity applies AASB 2022-10 for an earlier period, it shall disclose that fact.

1. Appendix F Australian implementation guidance for not-for-profit public sector entities is added as set out on pages 8–10 of this Standard.

1. Australian illustrative examples for not-for-profit public sector entities is attached to accompany AASB 13 as set out on pages 11–15 of this Standard.

Commencement of the legislative instrument

1. For legal purposes, this legislative instrument commences on 31 December 2023.

Appendix F [FOR AASB 13]
Australian implementation guidance for not-for-profit public sector entities

This appendix is an integral part of the Standard. It describes the application of paragraphs 61, 62, 89, B8 and B9 of the Standard. The appendix applies only to not-for-profit public sector entities.

Introduction

F1AASB 13 Fair Value Measurement incorporates International Financial Reporting Standard IFRS 13 Fair Value Measurement, issued by the International Accounting Standards Board. Consequently, the text of AASB 13 is generally expressed from the perspective of for-profit entities. The AASB prepared this appendix to explain and illustrate the application of the principles of paragraphs 61, 62, 89, B8 and B9 of the Standard by not-for-profit public sector entities in relation to fair value measurement of non-financial assets not held primarily for their ability to generate net cash inflows. This appendix does not apply to for-profit entities or not-for-profit private sector entities or affect their application of AASB 13.

Developing unobservable inputs (paragraphs 61, 62 and 89)

F2Paragraph 22 requires an entity to measure the fair value of an asset using the assumptions that market participants would use when pricing the asset, assuming that market participants act in their economic best interest. Paragraph 23 states that, in developing those assumptions, an entity need not identify specific market participants.

F3Unobservable inputs are defined as inputs for which market data are not available and that are developed using the best information available about the assumptions that market participants would use when pricing the asset or liability. Paragraph 87 states that unobservable inputs shall be used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Paragraph 89 states that, in developing unobservable inputs, an entity:

(a)may begin with its own data, but it shall adjust those data if reasonably available information indicates that other market participants would use different data or there is something particular to the entity that is not available to other market participants (eg an entity-specific synergy); and

(b)need not undertake exhaustive efforts to obtain information about market participant assumptions.

F4Various non-financial assets of not-for-profit public sector entities not held primarily for their ability to generate net cash inflows, especially some that are specialised, do not have observable market selling prices or other observable market data because entities seldom sell those assets until their economic life has expired (ie there is little market activity for the asset or comparable assets at the measurement date). Consequently, in applying the requirement of paragraph 61 for fair value estimates to maximise the use of relevant observable inputs, it may nonetheless be necessary to develop unobservable inputs to estimate their fair value. Moreover, for assets that are unique to a government, observable evidence of assumptions of other market participants, if any, is unlikely to differ from the entity’s own assumptions.

F5Accordingly, when applying the principles in paragraphs 61 and 62 to measure the fair value of a non-financial asset of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows, if both the market selling price of a comparable asset and some market participant data required to measure the fair value of the asset are not observable, the entity shall use its own assumptions as a starting point in developing unobservable inputs and adjust those assumptions to the extent that reasonably available information indicates that other market participants (including, but not limited to, other not-for-profit public sector entities) would use different data.

F6For the purposes of paragraph F5, exhaustive efforts need not be undertaken to identify whether relevant information about other market participant assumptions is reasonably available or whether the entity’s own data should be adjusted. However, when information about market participant assumptions is reasonably available, an entity cannot ignore that information. To the extent that relevant information about other market participant assumptions is not reasonably available, the entity shall use its own assumptions in measuring the fair value of the asset.

F7For the purposes of paragraphs F5 and F6, for assets with various inputs to their fair value estimate, observable market data might be reasonably available for some inputs, in which instances unobservable inputs would be used for the remainder of the asset’s fair value estimate. For example, the land component of a self-constructed specialised facility might have comparable land with an observable market price, but entity-specific data might be needed to measure the fair value of some or all of the improvements on that land included in the fair value estimate for the facility.

Application of the cost approach (paragraphs B8 and B9)

F8Paragraphs B8 and B9 state that the cost approach reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost), based on the cost to a market participant buyer to acquire or construct a substitute asset of comparable utility, adjusted for obsolescence.

F9Accordingly, when measuring the fair value of a non-financial asset of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows (the subject asset) using the cost approach, an entity shall:

(a)estimate the cost currently required for a market participant buyer to acquire or construct a reference asset (ie the replacement cost of a reference asset) in accordance with paragraphs F11–F15; and

(b)adjust the estimate in (a) for any:

(i)differences between the current service capacity of the reference asset and the subject asset (for example, where the modern equivalent asset is engineered to a higher standard than the subject asset, such as where the subject asset is a building and the modern equivalent building has superior fire safety features and a greater number of lifts than the subject building); and

(ii)obsolescence (physical deterioration, functional obsolescence and economic obsolescence).

F10A reference asset is a suitable alternative to the subject asset that the market participant buyer would consider in developing its pricing assumptions about the subject asset. Identifying the most appropriate reference asset involves the application of judgement and, on occasion, detailed valuation assessments in the circumstances of the subject asset. A reference asset could be a modern equivalent asset or a replica asset (where the utility offered by the subject asset could be provided only, or more cheaply, by a replica rather than a modern equivalent asset). A modern equivalent asset is an asset that provides similar function and equivalent utility to the subject asset, but is of a current design and constructed or made using current cost-effective materials and techniques.

Estimating the replacement cost of a reference asset

F11For the purposes of paragraph F9(a), when estimating the replacement cost of a reference asset, an entity:

(a)assumes the reference asset will be acquired or constructed at the subject asset’s existing location; and

(b)where paragraph F5 applies, shall use its own assumptions as a starting point in developing unobservable inputs to measure the costs currently required to acquire or construct a reference asset and adjust those assumptions to the extent that reasonably available information indicates that other market participants would use different data.

F12When applying paragraphs F9(a) and F11, the entity shall, subject to paragraph F14, include the following costs (among other costs) in the reference asset’s replacement cost if they are judged to be necessarily incurred in the hypothetical acquisition or construction of the reference asset at the measurement date:

(a)costs required to restore another entity’s asset, if the asset that would need restoration existed at the measurement date and would be disturbed in a hypothetical acquisition or construction of the reference asset. However, such costs are excluded if they relate to restoration of an asset of another entity included in the consolidated group (if any) to which the entity belongs;

(b)other disruption costs that would hypothetically be incurred when acquiring or constructing the reference asset at the measurement date (eg costs of redirecting traffic when replacement of the reference asset, such as a drainage pipe, disrupts the operation of a road); and

(c)if the subject asset is fixed to a parcel of land, site preparation costs for the reference parcel of land on which the reference asset would hypothetically be constructed, unless those site preparation costs are reflected (explicitly or implicitly) in the fair value measurement of the subject parcel of land.

F13For the purposes of paragraph F12(c), site preparation costs include, but are not limited to:

(a)costs required to prepare the land (eg earthworks) for the hypothetical construction of the reference asset; and

(b)costs required to remove and dispose of any unwanted existing structures on the land to make way for the hypothetical construction of the reference asset.

F14An entity applies judgement in determining which costs would necessarily be incurred in the hypothetical acquisition or construction of a reference asset with the same service capacity and condition as the subject asset at the measurement date. An entity need not undertake exhaustive efforts to obtain information about the costs referred to in paragraphs F12 and F13. However, an entity shall include all such costs for which data are reasonably available.

F15When applying the cost approach in accordance with paragraph F9(a) to measure the fair value of a heritage asset of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows, to the extent that its heritage features are an essential part of its service capacity, the replacement cost of the reference asset generally means the cost of replicating the heritage and other features of the subject asset (ie reproduction cost). Replication would assume reconstruction using modern cost-effective materials and processes, but sympathetic with the original heritage design and structure to the extent feasible.

Economic obsolescence

F16For the purposes of paragraph B9 and paragraph F9(b)(ii), when a non-financial asset of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows has suffered a reduction in demand for its services, the identification of ‘economic (ie external) obsolescence’ does not require a formal decision to have been made to reduce the physical capacity of that asset.

F17When an asset described in paragraph F16 apparently has surplus capacity in view of current demand for its services, economic obsolescence is not identified for that asset if that ‘surplus capacity’ is necessary for stand-by or safety purposes (eg to deal with contingencies), even if it seldom or never is actively utilised. An example of an asset with stand-by capacity that is necessary for operational purposes, and would be replaced in full by a market participant buyer, is an electricity generation plant that maintains a generating capacity buffer that is typical of the industry to cater for periods of peak demand.

F18An example of a strong indicator that economic obsolescence of assets would be identified when applying the principles in paragraphs F16 and F17 is a public school’s buildings that have a capacity for 500 students but, due to demographic changes, a school for 100 students would meet current and reasonably foreseeable requirements, including a buffer needed for any temporary or underestimated student demand. In this example, based on these assumed facts alone (for simplicity), the school buildings’ gross replacement cost would be based on the school’s needed capacity (for 100 students), from which any other accumulated obsolescence related to the condition of the school buildings (eg physical obsolescence) would be deducted. Consistent with paragraph F16, the conclusion reached would not depend on whether a formal decision has been made to reduce the school buildings’ capacity.

F19Where an asset or a facility that is not held primarily for its ability to generate net cash inflows suffers a significant reduction in demand for its services, any economic obsolescence identified would not necessarily (and frequently would not) exhibit a linear relationship with that reduced level of demand. This is due to economies of scale causing some parts of an asset or a facility potentially needing replacement in full, or almost in full, despite a significant fall in demand for the services provided by the asset or facility, in which case the needed physical capacity of the asset or facility would not reduce linearly with the reduction in the level of demand for that asset’s or facility’s services. In the school example in paragraph F18, the administration office, canteen, toilet blocks, library and gymnasium might need replacing even for 100 students, although perhaps on a slightly smaller scale.

Australian illustrative examples for not-for-profit public sector entities

These illustrative examples accompany, but are not part of, AASB 13. They illustrate aspects of Appendix F Australian implementation guidance for not-for-profit public sector entities in AASB 13, but are not intended to provide interpretative guidance.

The IASB published Illustrative Examples accompanying IFRS 13 Fair Value Measurement, which are available on the AASB website. Those IASB examples illustrate aspects of IFRS 13 but are not intended to provide interpretative guidance. Those examples portray hypothetical situations illustrating the judgements that might apply when an entity measures assets and liabilities at fair value in different valuation situations. The following examples illustrate aspects of Appendix F Australian implementation guidance for not-for-profit public sector entities in AASB 13. They complement the IASB’s Illustrative Examples.

IE1The following examples portray hypothetical situations. They are intended to illustrate how a not-for-profit public sector entity might apply some requirements of AASB 13 Fair Value Measurement to particular types of assets, on the basis of the limited facts presented. Although some aspects of the examples might be present in actual fact patterns, all relevant facts and circumstances of a particular asset would need to be evaluated when applying AASB 13. The evaluations in each example are not intended to represent the only manner in which AASB 13 could be applied.

Fair value of a non-financial asset not held primarily for its ability to generate net cash inflows and measured under the cost approach

Nature of costs included in the replacement cost of a reference asset (paragraphs F9(a) and F11–F15)

IE2Examples 1–4 illustrate the costs included in the replacement cost of a reference asset for the purpose of measuring the fair value of a non-financial asset not held primarily for its ability to generate net cash inflows under the cost approach in accordance with paragraphs B8 and B9, and in paragraphs F9(a) and F11–F15.

Example 1 – Costs included in the gross replacement cost of a reference asset for a road

A local government (Council A) applies the revaluation model after recognition of each class of property, plant and equipment, as referred to in paragraph 31 of AASB 116 Property, Plant and Equipment.

Council A recognises roads and land under roads as separate classes of assets. It measures the fair value of its roads using the cost approach. This example illustrates the consideration of the costs to include in the gross replacement cost of a reference road. The measurement of accumulated obsolescence and the valuation of land are not addressed in this example.

As at 30 June 20X2, Council A controls a particular road (the subject road). In the process of using the cost approach to measure the fair value of the road, Council A determines which costs to include in the replacement cost of a reference road.

The costs in the list below, measured using prices as at that measurement date, relate to the reference road. For simplicity, in this example, it is assumed that the replacement of the reference road would occur within a year and, consequently, in the current market environment, material financing costs (from the perspective of the market participant) would not be incurred in replacing the reference road.

Costs (excluding costs to remove unwanted existing structures and disruption costs: see below)	Estimated cost as at 30 June 20X2
$’000
Design work	2,200
Earthworks	10,000
Formation	5,000
Pavement	3,000
Surfacing	2,000
Total	22,200

The following two types of costs also relate to the reference road as at 30 June 20X2.

Costs to remove unwanted existing structures and disruption costs

Council A’s road is situated in a densely populated area, and Council A assesses that, since there is no vacant site in the surrounding area as at 30 June 20X2, to construct a road in a hypothetical acquisition, a market participant buyer would need to incur $2,000,000 to remove unwanted structures on the land to make way for the construction of the road. Council A did not reflect any land improvement or remediation costs in the fair value of the land under the road.

In addition, because the construction work to replace the subject road at the measurement date would require interruption of power and water supplies, Council A assumes that the majority of that construction work would occur at night-time to minimise disruption to the community. Council A estimates that, if that work were performed mainly at night-time, it would cost $1,000,000 as at 30 June 20X2. In contrast, if those construction works were performed during the daytime, Council A estimates that those costs would reduce to $500,000 as at 30 June 20X2. Council A determined that there is no reasonably available information indicating that another market participant would construct a road at the location of the Council’s road during the daytime.

Estimating the gross replacement cost of a reference road as at 30 June 20X2

Costs to a market participant buyer

In accordance with paragraph F9(a), Council A applies judgement in determining which costs to include in a reference road as at the measurement date (30 June 20X2).

Council A concludes that each of the estimated costs listed above (which total $22,200,000) and the other necessarily incurred costs analysed below should be included in reference road’s replacement cost because all components of the road, including the once-only earthworks and formation works, would need to be undertaken in a hypothetical construction of a reference road at the measurement date. This is because the cost to a market participant buyer to acquire or construct a substitute road of comparable utility at the subject road’s existing location would include each of those costs, including any intrinsically linked disruption costs (eg traffic control and detour costs).

Costs of removal and disposal of unwanted existing structures

In addition, Council A includes the estimated costs of removal and disposal of unwanted existing structures at $2,000,000 as at 30 June 20X2 in the reference road’s replacement cost. This is because it is reasonable to expect that a market participant buyer would need to incur such costs if it was to construct a substitute road at the subject road’s existing location, since there is no vacant land available in the area.

Disruption costs

Since there is no reasonably available information indicating that another market participant would construct a road at the location of the Council’s road during the daytime, Council A uses the more costly night-time disruption costs of $1,000,000 in its estimated replacement cost of the reference road as at 30 June 20X2 rather than the lower daytime costs.

Consequently, Council A measures the gross replacement cost of the reference road as at 30 June 20X2 as $25,200,000 (ie $22,200,000 + $2,000,000 + $1,000,000).

Example 2 – Difference in the asset’s operating environment affecting the reference asset’s gross replacement cost

A local government (Council B) applies the revaluation model after recognition of each class of property, plant and equipment, as referred to in paragraph 31 of AASB 116.

Council B recognises buildings and land under buildings as separate classes of assets. It measures the fair value of its buildings using the cost approach. The measurement of accumulated obsolescence and the valuation of land are not addressed in this example.

As at 30 June 20X2, Council B uses the following assumptions in measuring one of its buildings at fair value:

·      when the building was originally constructed by Council B (20 years ago), there were no internet cables underneath the site;

·      ten years ago, another entity installed internet cables with protective pipes under the site where Council B’s building is located;

·      Council B determined that, if its building was to be replaced as at the measurement date of 30 June 20X2, the other entity’s pipes that protect the internet cables would be disrupted;

·      the gross replacement cost necessary to restore those pipes disrupted during the hypothetical replacement of the components of Council B’s building is $500,000; and

·      Council B is not part of a group of entities that prepares consolidated financial statements.

Restoration costs for disrupted assets of another entity

Since Council B determined that if its building was to be replaced as at 30 June 20X2, the other entity’s pipes would be disrupted, when measuring the fair value of Council B’s building under the cost approach in accordance with paragraphs F9(a) and F12(a), the reference building’s gross replacement cost would include the $500,000 restoration cost for the pipes.

The restoration cost is included despite the fact that Council B did not incur those costs when it originally constructed the building. This is because fair value measurements consider the conditions of the asset as at the measurement date and, in its circumstances, Council B determined that the cost to a market participant buyer to acquire or construct a substitute building at the existing location would necessarily include those restoration costs. In addition, because Council B is not part of a group of entities that prepares consolidated financial statements, the ‘same group’ scope exclusion for such costs in paragraph F12(a) does not apply to Council B.

Example 3 – Whether to adjust the entity’s own assumptions in measuring a non-financial asset

The Transport Department of a State Government (Department B) estimates the fair value of its railway tracks as at 30 June 20X1 using the cost approach. Department B determined that there are no observable market prices for completed suitable railway tracks, and not all other market participant data required to measure the fair value of railway tracks are observable.

The cost currently required to acquire or construct Department B’s modern equivalent railway tracks would be 30% lower if they were manufactured overseas instead of in Australia. There is no legal requirement for the tracks to be manufactured in Australia. However, the Commonwealth Government provides significant funding assistance for both the public sector and the private sector to acquire or replace public transport assets. The policy is that at least 50% of federally co-funded asset acquisitions must be manufactured in Australia. The State Government controlling Department B has identified railway tracks as one of the asset types the replacement of which contributes to meeting that domestic 50% requirement.

Based on the Commonwealth Government’s unlegislated policy regarding Australian-manufactured content, Department B assesses that replacement of the railway tracks would, in the ordinary course of operations, be achieved by their manufacture in Australia. There is no reasonably available information indicating that another market participant would acquire railway tracks overseas.

Estimating the replacement cost of a reference asset as at 30 June 20X1

In accordance with paragraphs F5 and F11(b), Department B estimates the cost currently required for a market participant buyer to acquire or construct a reference asset by using its own assumptions as a starting point and adjusting those assumptions to the extent that reasonably available information indicates that other market participants would use different data.

Since there is no reasonably available information indicating that another market participant would acquire railway tracks overseas, Department B uses the more expensive costs of Australian manufacture in its estimated replacement cost of reference railway tracks as at 30 June 20X1, notwithstanding the absence of a legal requirement for their manufacture in Australia.

Site preparation costs (paragraph F12(c))

IE3In respect of a non-financial asset not held primarily for its ability to generate net cash inflows and measured under the cost approach in paragraphs B8 and B9, Example 4 illustrates how a particular entity treats site preparation costs, in accordance with paragraph F12(c), when measuring the fair value of assets using the cost approach.

Example 4 – Site preparation costs

Each Health Department of three jurisdictions was transferred land on 1 July 20X0 to be used to construct a remote airstrip for airborne health services.

The subject asset for each Health Department is the airstrip, and the valuation of land under the airstrip is not addressed in this example.

Each of those three Health Departments:

(a)            recognises airstrips and land under airstrips as separate classes of asset;

(b)            incurred $1,500,000 (excluding any site preparation costs) to construct the airstrip. The construction was completed in June 20X1;

(c)            measures the fair value of the airstrip at current replacement cost under the cost approach; and

(d)            determined that site levelling costs are not reflected (explicitly or implicitly) in the fair value measurement of the land under the airstrip because market participants acquiring the land for other purposes would not require a level site.

As at 30 June 20X1, the fair value of each Health Department’s airstrip was estimated. For simplicity, the following common assumptions are made for each of those three Health Departments:

(a)            it is assumed that the value of land in the proximity of the airstrip, and any site preparation costs, did not change between 1 July 20X0 and the measurement date of 30 June 20X1;

(b)            the cost to construct the airstrip did not change since its construction;

(c)            in relation to the requirements of paragraph F14, data are reasonably available for the site preparation costs and costs of constructing the airstrip; and

(d)            any profit margin on the entity’s own site preparation costs that would be demanded by external contractors and would increase the amount that not-for-profit public sector market participant buyers would be prepared to pay for the subject asset (as reflected in the asset’s current replacement cost) is ignored.

The site preparation costs determined in accordance with paragraph F12(c) are analysed for the following assumed facts for the Health Department of each jurisdiction:

Jurisdiction A

The transferred land (airstrip site) was undulating, and the Health Department incurred a cost of $3,000,000 to level the site. Available land in the proximity of the airstrip site was also undulating.

Jurisdiction B

The airstrip site was undulating, and the Health Department incurred a cost of $3,000,000 to level the site. Available land in the proximity of the airstrip site was level. The Health Department would not have chosen a parcel of undulating land, but the land was transferred to it.

Jurisdiction C

The airstrip site was level. Available land in the proximity of the airstrip site was undulating.

Site preparation cost assessments as at 30 June 20X1

Jurisdiction A

It would be expected that another market participant buyer would need to incur a cost of $3,000,000 to level the reference parcel of land to be a fit-for-purpose site for the modern equivalent airstrip, since the only available land in the proximity is also undulating. Using the cost approach, the Health Department in Jurisdiction A measures the replacement cost of a reference airstrip as at 30 June 20X1 as $4,500,000 ($3,000,000 site levelling cost and $1,500,000 other construction cost).

Jurisdiction B

It would be expected that another market participant buyer could hypothetically purchase a level site, in which case, it would not need to incur the $3,000,000 site levelling cost. Using the cost approach, the Health Department in Jurisdiction B measures the replacement cost of a reference airstrip as at 30 June 20X1 as $1,500,000.

Jurisdiction C

It would be expected that another market participant buyer, being unable to acquire a level site (to hypothetically construct a modern equivalent airstrip) as an alternative to acquiring the Health Department’s airstrip, would be prepared to pay for the cost of site levelling when pricing the airstrip. The Health Department in Jurisdiction C measures the replacement cost of a reference airstrip as at 30 June 20X1 as $4,500,000 ($3,000,000 site levelling cost and $1,500,000 other construction cost), despite the fact that it did not actually incur any site levelling costs when the airstrip was constructed.

Including the $3,000,000 site levelling cost in the fair value measurement of the airstrip represents the advantage for a market participant buyer to possess the Health Department’s airstrip (ie would be considered by a market participant buyer when pricing the airstrip). The advantage to a market participant buyer of possessing the Health Department’s airstrip would include that the buyer would avoid the need to incur site levelling costs to prepare an undulating parcel of land for the construction of a reference airstrip.

This example assumes the value attributed by market participants to the site levelling is included in the estimated current replacement cost of the airstrip. That simplifying assumption would not necessarily be appropriate in all situations. For example, a particular entity with circumstances similar to those of the Health Department in Jurisdiction B might value the land under the airstrip using the market approach and the valuations before and after that site levelling might indicate that the site levelling increased the fair value of that parcel of land. Where the fair value of land incorporates the value attributed by market participants to site improvements, the cost of those improvements would, in accordance with paragraph F12(c), be excluded from the current replacement cost of improvements measured using the cost approach.

Economic obsolescence (paragraphs F16–F19)

IE4Example 5 illustrates an assessment of whether economic obsolescence should be identified in relation to an asset not held primarily for its ability to generate net cash inflows, if the asset is measured at current replacement cost under the cost approach in paragraphs B8 and B9.

Example 5 – Kitchen with underutilised potential

A not-for-profit public sector institute (College A) measures the furniture and fittings in its college building at fair value using the cost approach. Its furniture and fittings include a kitchen of commercial standard necessary for training student chefs. The kitchen is an essential asset for College A to fulfil its teaching objectives, although it was planned not to be utilised outside the scheduled class times.

In this example, it is assumed that:

·      the kitchen is scheduled to be used four hours per week;

·      the amount of kitchen equipment aligns with the intended number of students per class;

·      the current cost to replace the teaching kitchen with an identical capacity kitchen, less all forms of obsolescence other than any economic obsolescence, is estimated as at the measurement date (30 June 20X3) as $250,000; and

·      if the kitchen requires replacing, College A would replace it with one that has the same physical capacity.

Current replacement cost assessment as at 30 June 20X3

College A assesses whether any economic obsolescence of its teaching kitchen has arisen as at the measurement date (30 June 20X3).

Although the teaching kitchen is operated with less intensity than physically possible, this does not indicate economic obsolescence has arisen. This is because the teaching kitchen is necessary for College A to fulfil its teaching objectives and is achieving the level of output planned. Another college ‘stepping into the shoes’ of College A would be willing to pay $250,000 to replace the kitchen’s service capacity.

Therefore, no economic obsolescence is deducted from the amount of $250,000, which is the kitchen’s current replacement cost as at 30 June 20X3.

Basis for Conclusions

This Basis for Conclusions accompanies, but is not part of, AASB 2022-10 Amendments to Australian Accounting Standards – Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities.

Introduction

BC1This Basis for Conclusions summarises the Australian Accounting Standards Board’s considerations in reaching the conclusions in this Standard, which amends AASB 13 Fair Value Measurement for application by not-for-profit public sector entities. It sets out the reasons why the Board developed the Standard, the approach taken to developing the amendments and the key decisions made. In making decisions, individual Board members gave greater weight to some factors than to others.

Reasons for undertaking the ‘Fair Value Measurement for Not-for-Profit Public Sector Entities’ Project

Majority of non-financial assets in the public sector are measured at fair value

BC2The Financial Reporting Council (FRC) issued a direction to the Board to require the Whole of Government (WoG) and the General Government Sector (GGS) to harmonise with Government Finance Statistics (GFS) requirements. Consequently, AASB 1049 Whole of Government and General Government Sector Financial Reporting requires each WoG and GGS to elect an accounting treatment that aligns with GFS principles and requirements where an Accounting Standard permits a choice (AASB 1049 paragraph 13). Because GFS requires assets and liabilities to be measured at current market value, this has resulted in each WoG and GGS electing to apply the revaluation model as its accounting policy and measure its non-financial assets, such as property, plant and equipment, at fair value under AASB 13.

BC3Although AASB 1049 requires only WoG and GGS to align with GFS principles, some stakeholders from the public sector have informed the Board that the Treasury or Finance Department (or other authority) or the Office of Local Government in each jurisdiction has issued instructions to require the other public sector entities in their jurisdiction to also elect the accounting treatments that align with GFS principles, which has led to the majority of non-financial assets of public sector entities being measured at fair value.

Inconsistency in applying the requirements of AASB 13

BC4The Board initially considered the application of AASB 13 for not-for-profit and public sector entities in 2011 when IFRS 13 Fair Value Measurement was issued. At its March 2011 and June 2011 meetings, the Board decided not to include any not-for-profit entity modifications to the requirements of IFRS 13 adopted in AASB 13. At that time, the Board considered that even though many non-financial assets in the public sector might have a specialised nature or that observable market inputs might not be readily available, a public sector entity would be able to measure the fair value of such assets at current replacement cost, under the cost approach in IFRS 13.

BC5At its December 2014 meeting, the Board considered feedback from stakeholders regarding the application of AASB 13. The Board decided to undertake a narrow-scope project to give relief from certain AASB 13 disclosures, limited to items of property, plant and equipment within the scope of AASB 116 Property, Plant and Equipment that are held primarily for their current service capacity rather than primarily to generate future net cash inflows, in relation to disclosure of quantitative and qualitative information about the significant unobservable inputs used in the fair value measurement of such assets. This project resulted in AASB 2015-7 Amendments to Australian Accounting Standards – Fair Value Disclosures of Not-for-Profit Public Sector Entities.

BC6During the due process of developing AASB 2015-7 and consideration of Invitation to Comment ITC 34 AASB Agenda Consultation 2017–2019 (in which the Board sought views on its priorities for its work program for the period 2017–2019), some stakeholders in the public sector asked the Board to provide guidance clarifying how to apply the requirements in AASB 13 to the fair value measurement of public sector entity assets.

BC7Many stakeholders in the public sector commented that applying AASB 13 had been challenging and costly. They requested guidance on how to measure the fair value of non-financial assets of not-for-profit public sector entities not held primarily for their ability to generate net cash inflows, in particular (but not limited to):

(a)the market participant assumptions to use in measuring fair value where a public sector entity’s asset has few or no market participants (other than the holder of the asset) and where information about market participants’ inputs to a current replacement cost model may be scarce;

(b)how government-imposed public-sector-specific restrictions on non-financial assets should be taken into account;

(c)how to measure the fair value of public sector entity assets using the cost approach; and

(d)the concept of obsolescence under the cost approach.

BC8The Board was advised that the measurement issues are pervasive in the not-for-profit public sector and involve inconsistent practical application of the principles of AASB 13.

BC9In addition, in considering its Service Concession Arrangements: Grantors Project, the Board decided at its February 2016 meeting that, because a service concession asset is an asset that the grantor uses for its service potential to achieve public service objectives (rather than to generate net cash inflows), only the cost approach to measuring fair value is relevant and, where the operator has been granted the right to future cash flows, this need not be considered in the measurement of the grantor’s service concession asset. In developing AASB 1059 Service Concession Arrangements: Grantors, the Board noted that it did not provide guidance on the measurement of service concession assets on the grounds that this would best be developed in a future project on the measurement of public sector assets – the Fair Value Measurement for Not-for-Profit Public Sector Entities Project (FVM project).

Due process

Fair Value Project Advisory Panel

BC10The Board established the Fair Value Project Advisory Panel (the Panel) to provide a forum for the Board to consult with on specific fair value measurement issues. The Panel consists of industry experts with experience in dealing with fair value measurement issues, and includes asset valuers and preparers and auditors of financial statements. The Board held numerous meetings with the Panel over the course of the project. The FVM project has been assisted considerably by extensive input from Panel members.

BC11As part of the FVM project, the Board also consulted with some asset valuers and the Australian Property Institute to seek understanding of how asset valuations are carried out in practice, and whether (and, if so, in what manner) the principles in AASB 13 differ from these practices.

Stakeholder feedback on the IPSASB’s Measurement project

BC12In April 2021, the International Public Sector Accounting Standards Board (IPSASB) issued Exposure Draft ED 77 Measurement. If approved as a final pronouncement, ED 77 would establish a single comprehensive Standard that identifies and defines the measurement bases used in IPSAS for not-for-profit public sector entities.

BC13ED 77 was developed based on the view that the fair value measurement basis under IFRS 13 (which is adopted in AASB 13) would be applicable to assets held for their financial capacity, but would be inappropriate for measuring the current value of assets held for their operational capacity (ie assets not held primarily for their ability to generate net cash inflows). Instead, the IPSASB proposed a different current value measurement basis – current operational value – for measuring the current value of assets held for their operational capacity.

BC14In contrast with fair value, which is a market-participant-based exit value reflecting an asset’s highest and best use, current operational value is proposed to be an entity-specific entry value based on an asset’s current use. The IPSASB proposed that the same three measurement techniques – the market, income and cost approaches – would be applicable in estimating both:

(a)an asset’s fair value, for assets held primarily for their financial capacity; and

(b)an asset’s current operational value, for assets held primarily for their operational capacity.

BC15In accordance with paragraph 20 of The AASB’s Approach to International Public Sector Accounting Standards (October 2019), in May 2021 the Board issued ITC 45 Request for Comment on IPSASB Exposure Drafts ED 76 Conceptual Framework Update: Chapter 7, Measurement of Assets and Liabilities in Financial Statements and ED 77 Measurement, to obtain Australian stakeholders’ views on the IPSASB’s proposals.

BC16The Board added AASB specific matters for comment in ITC 45 to specifically obtain views on whether Australian stakeholders would prefer that the Board adopts, in respect of current value measurement of non-financial assets of not-for-profit entities not held primarily for their ability to generate net cash inflows, the IPSASB’s proposed current operational value measurement basis or continues requiring the fair value measurement basis.

BC17The Board received six comment letters on ITC 45. Based on those comment letters and on the feedback received from related outreach activities, the Board noted that a significant majority of stakeholders that responded to ITC 45, including not-for-profit public sector entities’ financial statement preparers, auditors and valuers, indicated that fair value under AASB 13 is appropriate for measuring the current value of all non-financial assets held by not-for-profit public sector entities, whether held primarily for their financial capacity or operational capacity, and should remain the sole current value measurement basis.

BC18The majority of these stakeholders also commented that they agree with applying the ‘highest and best use’ and ‘market participants’ concepts under fair value for measuring the current value of non-financial assets not held primarily for their ability to generate net cash inflows, although some stakeholders have sought the Board’s guidance to assist entities to understand better how these concepts should be applied in the not-for-profit public sector context. They considered that applying the fair value basis to all non-financial assets, despite the need to exercise judgement in applying those concepts, would be preferable to applying two measurement bases, as proposed in the IPSASB’s Exposure Drafts. This is because it would avoid:

(a)the need for financial statement preparers, auditors and valuers to understand the requirements of two measurement bases;

(b)imposing potential additional costs and effort to assess which measurement basis is appropriate for each asset or class of assets, or to reassess the appropriate measurement basis when there is a change in how an entity uses an asset; and

(c)reporting to users of financial statements of not-for-profit public sector entities current values based on mixed measurement bases, which would reduce the comparability and understandability of the totals reported.

BC19At the date of issue of this Standard, the IPSASB was continuing to develop a Measurement Standard and related amendments to its Conceptual Framework based on its proposals in ED 76 and ED 77.

Stakeholder feedback on AASB ED 320

BC20The Board considered the comments received on ITC 45 and continued developing guidance to assist not-for-profit public sector entities to apply the principles of AASB 13 more consistently in measuring their non-financial assets not held primarily for their ability to generate net cash inflows, in addressing the stakeholders’ requests noted in paragraph BC7.

BC21The Board issued Exposure Draft ED 320 Fair Value Measurement of Non-Financial Assets of Not-for-Profit Public Sector Entities in March 2022 to propose adding authoritative implementation guidance on how to apply the following principles in measuring the fair value of a non-financial asset not held primarily for its ability to generate net cash inflows:

(a)the market participant assumptions to use;

(b)the circumstances in which the asset’s current use is presumed to be its highest and best use;

(c)the ‘financially feasible use’ aspect of highest and best use (AASB 13 paragraph 28(c)); and

(d)how to measure the current replacement cost of such a non-financial asset, including the nature of component costs to include in that amount, the factors to consider in identifying economic obsolescence, and whether current replacement cost should be measured assuming the asset’s replacement occurs in its existing location.

BC22Another key purpose of developing additional guidance is to enable application of AASB 13 in a more cost-effective manner by clarifying its application, including clarifying the extent to which preparers of financial statements need to search for information in the absence of observable market inputs.

BC23ED 320 was exposed for 90 days, and the Board conducted three virtual roundtables to elicit feedback on the proposals. The Board received sixteen written submissions and observed that:

(a)other than one respondent who disagreed with most aspects of the ED 320 proposals, generally, stakeholders supported modifying AASB 13 (to varying degrees) to assist not-for-profit public sector entities in applying the principles noted in paragraph BC21; but

(b)significant refinements would be needed in the drafting of the modifications to address potential application issues.

BC24The Board considered the feedback on ED 320 and revised the drafting of the modifications. The Board developed a Fatal-Flaw Review draft version of the Standard to identify any unintended consequences of the revisions made to the proposed modifications.

Stakeholder feedback on the Fatal-Flaw Review draft version

BC25In October 2022, the Board issued for comment a Fatal-Flaw Review draft version of the Standard. The Board received written submissions on the draft Standard from three respondents, who also responded to ED 320. The Board also received comments from Panel members during a Panel meeting held in November 2022.

BC26Of the three respondents who provided a written submission:

(a)one supported all the Board’s proposals;

(b)one supported all the proposed principles in the draft Standard but commented that certain areas of the draft Standard can be refined; and

(c)the ED respondent who disagreed with most aspects of the ED 320 proposals elaborated on their disagreement with the Board’s proposals.

BC27The respondent referred to in paragraph BC26(c) expressed the following concerns about the proposals in their submissions on ED 320 and the Fatal-Flaw Review draft:

(a)fair value measurements of some assets would be affected by an entity’s subjective assessment of whether the asset is held primarily for its ability to generate net cash inflows (which therefore would determine whether the asset’s fair value measurement is subject to the proposed modifications to AASB 13). Uniform guidance on fair value measurement should be applicable to all reporting entities, regardless of their sector, because the principles of valuation hold regardless of the sector in which the entity controlling the asset operates;

(b)modifying AASB 13, such as adding to AASB 13 criteria that constrain when an alternative use may be identified as an asset’s highest and best use and introducing non-financial influences into the concept of financial feasibility, would be likely to result in departures from the principles of IFRS 13; and

(c)the notion that hypothetical not-for-profit public sector market participant buyers exist for public sector entity assets is ethereal and unrealistic. The respondent considers that the hypothetical transaction underpinning the fair value concept in AASB 13 should be supported by actual market activity, or the generation of actual cash flows that support assumptions about what that market activity might be.

BC28In addition, the respondent made the following comments:

(a)fair value and market value are one and the same. The same estimate of fair value should result for a given asset, regardless of whether the market approach, income approach or cost approach is used; and

(b)the costs associated with the provision of community service obligations are never more transparent than when a new public sector asset is valued at less than its cost of acquisition, and when the continuing use of a community asset is deemed not to be that asset’s highest and best use. The public sector does not necessarily make investment decisions based on the concept of highest and best use. However, users of financial statements should be provided the opportunity to identify when this occurs.

BC29In respect of the respondent’s concerns noted in paragraph BC27(a), the Board observed that a precedent exists in the requirements of Australian Accounting Standards for not-for-profit entities to base the measurement of assets on whether they are held primarily to generate net cash inflows. AASB 136 Impairment of Assets does not apply to specialised assets of not-for-profit entities that are held for continuing use of their service capacity and not held primarily for their ability to generate net cash inflows if those assets are regularly revalued to fair value (AASB 136 paragraph Aus5.1). In relation to the respondent’s comment – that uniform guidance on fair value measurement should be applicable to all reporting entities regardless of their sector – the AASB Not-for-Profit Entity Standard-Setting Framework sets out the circumstances in which not-for-profit or public-sector-specific modifications to IFRS Standards are justified. As discussed in paragraphs BC39–BC41, the Board considers that all decisions leading to the modifications to AASB 13 set out in this Standard complied with that Framework.

BC30In respect of the respondent’s comment about departures from the principles of IFRS 13, noted in paragraph BC27(b), the Board took into account the possibility of non-conformity with IFRS 13 in some fair value measurements, as explained in paragraphs BC37 and BC38. As noted in paragraphs BC39–BC41, the Board concluded that the particular features of the public sector – together with cost/benefit considerations – warrant that risk.

BC31The Board observed that the notion of hypothetical not-for-profit public sector market participant buyers referred to in paragraph BC27(c) above is key to not measuring the fair values of many public sector entity assets at scrap value. This is supported by the IASB’s Basis for Conclusions on IFRS 13, paragraph BC78, that “… In effect, the market participant buyer steps into the shoes of the entity that holds that specialised asset.”

BC32The IASB noted in paragraph BC79 of its Basis for Conclusions on IFRS 13 that sometimes an observed market price – one for sale on a stand-alone basis – will not reflect an asset’s fair value (because it does not reflect the value that the asset contributes to the entity, which is achieved by using the subject asset in combination with other assets). The IASB’s rationale seems to provide a precedent for concluding that hypothetical not-for-profit public sector market participant buyers would be willing to pay more than a stand-alone selling price for an asset if the asset generates greater benefits when used in combination with other assets.

BC33The Board considered that the comments in paragraphs BC78 and BC79 of the IASB’s Basis for Conclusions on IFRS 13 suggest that the respondent’s view noted in paragraph BC28(a) – that the same estimate of fair value should result for a given asset, regardless of whether the market approach, income approach or cost approach is used – would not always hold true.

BC34As noted in paragraph BC28(b), the respondent expressed a view that users of financial statements should always be provided the opportunity to identify when an asset is not generating the return expected from the asset’s highest and best use. The Board considered that this concern stems mainly from the different perceptions of what an asset’s highest and best use is and the respondent’s disagreement with the Board’s view that other not-for-profit public sector entities should be considered market participants for a non-financial asset of a not-for-profit public sector entity held primarily for its service potential rather than to generate net cash inflows (the subject asset).  Under that Board view, another not-for-profit public sector market participant is likely to:

(a)be willing to pay a higher price, if necessary, for the subject asset than the amount on which an investment return is expected from any net cash inflows the subject asset generates; and

(b)continue the subject asset’s current use (unless the presumption is rebutted) on the basis that the market participant ‘stepping into the shoes’ of the not-for-profit public sector entity holding the subject asset would use the asset to continue providing services to the community rather than for an alternative use.

BC35As explained in paragraphs BC31and BC32 above, the Board’s view is consistent with the view of the IASB in IFRS 13. Other respondents to ED 320/Fatal-Flaw Review draft expressed agreement with this view and support the Board’s proposals. Accordingly, the Board decided to proceed with the modifications to AASB 13.

Comparison with IFRS 13

BC36The Board observed that not-for-profit public sector entities complying with this Standard might not comply with IFRS 13.

BC37This Standard makes the following modifications to the requirements of IFRS 13 adopted in AASB 13, which apply only to fair value measurements of non-financial assets of not-for-profit public sector entities not held primarily for their ability to generate net cash inflows:

(a)an entity is required to consider whether an asset’s highest and best use differs from its current use only when, at the measurement date, it is:

(i)classified as held for sale or held for distribution to owners in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations; or

(ii)highly probable that the asset will be used for an alternative purpose to its current use (see paragraphs Aus29.1 and Aus29.2);

(b)an asset’s use is ‘financially feasible’ if market participants would be willing to invest in the asset’s service capacity, considering both the capability of the asset to be used to provide needed goods or services to beneficiaries and the resulting cost of those goods or services (see paragraph Aus28.1);

(c)if both the market selling price of a comparable asset and some market participant data required to measure the fair value of an asset are not observable, the entity is required to use its own assumptions as a starting point in developing unobservable inputs to measure the fair value of the subject asset and adjust those assumptions to the extent that reasonably available information indicates that other market participants would use different data (see paragraphs F5 and F11(b)); and

(d)if an asset is measured using the cost approach, the entity is required:

(i)to assume that the asset will be replaced in its existing location, even if it would be feasible to replace the asset in a cheaper location at the measurement date (see paragraph F11(a)); and

(ii)not to identify economic obsolescence for the asset if the asset contains ‘surplus capacity’ necessary for stand-by or safety purposes (see paragraph F17).

BC38IFRS 13 does not specify:

(a)that the entity’s own data is required to be used as a starting point under certain circumstances. IFRS 13 paragraph 89 states that the entity’s own data may be used as a starting point when developing unobservable inputs;

(b)any specific criteria for determining when market or other factors suggest that an alternative use of an asset by market participants would be the asset’s highest and best use. Consequently, the modification of AASB 13 in paragraphs Aus29.1 and Aus29.2 – specifying that an entity is required to consider whether the asset’s highest and best use differs from its current use only when, at the measurement date, it is classified as held for sale or held for distribution to owners in accordance with AASB 5 or it is highly probable that the asset will be used for an alternative purpose to its current use – creates the potential for particular fair value measurements to be non-compliant with IFRS 13. This is because applying paragraphs Aus29.1 and Aus29.2 might delay the identification of a higher and better alternative use compared with application of paragraph 29 of IFRS 13 alone. The Board concluded such potential for non-compliance with IFRS 13 is warranted by the unique aspects of the processes in the public sector for selling, distributing to owners or redeploying assets (see paragraphs BC52–BC59);

(c)that the capability of the asset to be used to provide needed goods or services and the resulting cost of those goods or services need to be considered (instead of whether a use of the asset would generate an investment return on that asset) when considering whether a use of an asset is financially feasible (see paragraphs BC82–BC88); and

(d)how the cost approach should be applied, beyond the brief requirements in IFRS 13 paragraphs B8 and B9.

The requirements of this Standard noted in paragraphs BC37 and BC38 might not comply with IFRS 13.

BC39The Board made reference to paragraphs 25 and 30 of the AASB Not-for-Profit Entity Standard-Setting Framework, which state that, when justified, the Board would modify IFRS Standards to address not-for-profit specific issues, including those involving:

(a)undue widespread and significant diversity in accounting practices (see paragraph 25(g)); and

(b)cost or effort of preparing and disclosing information that outweighs the benefits to users (see paragraph 30(h)).

BC40As mentioned in paragraphs BC7 and BC8, many public sector stakeholders commented that applying AASB 13 had been challenging and costly and that the measurement issues are pervasive in the not-for-profit public sector and involve inconsistent practical application of the principles of AASB 13. Accordingly, the Board undertook the FVM project to provide guidance that:

(a)assists the not-for-profit public sector to apply the principles of AASB 13 more consistently; and

(b)                 enables the application of AASB 13 in a more cost-effective manner by clarifying its application, including clarifying the extent to which preparers of financial statements need to search for information in the absence of observable market inputs to fair value measurements.

BC41In addition, the modifications in paragraphs Aus29.1 and Aus29.2 regarding an asset’s highest and best use are designed to reduce the cost and effort of a not-for-profit public sector entity resulting from searching unnecessarily for possible alternative uses of an asset not held primarily for its ability to generate net cash inflows.

BC42The Board observed that the modifications to AASB 13 in this Amending Standard:

(a)would not necessarily change practice for some not-for-profit public sector entities; and

(b)do not indicate that entities changing practice in how they measure relevant assets made an error in applying the existing requirements of AASB 13.

The highest and best use of a non-financial asset not held primarily for its ability to generate net cash inflows (paragraphs Aus28.1, Aus29.1 and Aus29.2)

BC43The Board noted that paragraph 29 of AASB 13 states a rebuttable presumption that an asset’s current use is its highest and best use. Paragraph 29 of AASB 13 states that “… an entity’s current use of a non-financial asset is presumed to be its highest and best use unless market or other factors suggest that a different use by market participants would maximise the value of the asset.”

BC44Regarding whether the current use of a non-financial asset of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows is presumed to be its highest and best use, the Board observed that IFRS 13 paragraph 29 (quoted in paragraph BC43) and the related IASB Basis for Conclusions paragraph (quoted below) provide guidance:

IFRS 13 does not require an entity to perform an exhaustive search for other potential uses of a non-financial asset if there is no evidence to suggest that the current use of an asset is not its highest and best use … the IASB concluded that in many cases it would be unlikely for an asset’s current use not to be its highest and best use after taking into account the costs to convert the asset to the alternative use. (IFRS 13 paragraph BC71)

BC45However, despite that IASB text, some stakeholders requested the Board to provide additional guidance about the highest and best use of non-financial assets referred to in paragraph BC44. These stakeholders do not consider the cost incurred to search for possible alternative uses of such an asset is justified when such an asset is very unlikely to be used for a purpose other than its current use, for the many cases in which the asset is:

(a)specialised, especially if the costs to convert the asset to the alternative use are high; and

(b)being used to provide necessary services to the public and, therefore, the public sector entity holding the asset is highly likely to continue using the asset to provide those services.

BC46The Board considered the request and decided to modify AASB 13 to reduce the cost and effort of an entity searching unnecessarily for possible alternative uses of a not-for-profit public sector entity’s non-financial asset not held primarily for its ability to generate net cash inflows. This is discussed in paragraphs BC49 to BC81.

BC47In addition, stakeholders requested the Board to provide guidance assisting not-for-profit public sector entities to apply the three concepts specified in paragraph 28 of AASB 13 for identifying the highest and best use of non-financial assets not held primarily for their ability to generate net cash inflows (which has practical effect when the presumption that the asset’s current use is its highest and best use is rebutted, after considering the circumstances in paragraphs Aus29.1 and Aus29.2 in which that might be the case). The Board decided that, in respect of such assets, implementation guidance is needed for the ‘financially feasible use’ concept in paragraph 28(c) of AASB 13, but implementation guidance is not needed regarding the application of the ‘physically possible use’ and ‘legally permissible use’ concepts in paragraphs 28(a) and 28(b). The Board’s views on the ‘physically possible use’ and ‘legally permissible use’ concepts are set out in paragraphs BC96–BC112.

BC48The Board concluded that, although the ‘financially feasible use’ concept should apply to fair value measurements of any non-financial asset, for an asset of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows, paragraph 28(c) of AASB 13 should be clarified in terms relevant to the not-for-profit public sector environment. Therefore, the Board added paragraph Aus28.1 in AASB 13. This is explained in paragraphs BC82–BC88.

The presumption that an asset’s current use is its highest and best use (paragraphs Aus29.1 and Aus29.2)

Proposal in ED 320

BC49The Board proposed in ED 320 that, for a non-financial asset of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows, the asset’s current use – to provide particular public services – should be presumed to maximise the value of the asset unless evidence exists that, at the measurement date, the appropriate level of management of the entity has committed to a plan to sell (including distribute) the asset or to use the asset for an alternative purpose. The Board considered that a higher and better use than the asset’s current use may be identified when the not-for-profit public sector entity has committed to a plan to sell such an asset or to use the asset for an alternative use, because the entity would have determined that the alternative use would generate greater benefits than its current use.

BC50For an asset subject to a committed-to plan of sale by an appropriate level of management, a conclusion that the asset’s highest and best use differs from its current use could be reached earlier than when the asset meets the classification requirement as ‘held for sale’ under AASB 5. Under paragraphs 6–8 of AASB 5, among other conditions, a non-current asset is classified as held for sale only if the asset is available for immediate sale and its sale must be highly probable. For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset, and an active programme to locate a buyer and complete the plan must have been initiated. In addition, subject to limited exceptions, the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification, and it must be unlikely that significant changes to (or withdrawal of) the plan will occur.

BC51Under the Board’s proposal in ED 320, for an asset subject to a committed-to plan of sale by an appropriate level of management, to conclude that the asset’s highest and best use differs from its current use, the entity’s appropriate level of management need not have initiated, at the measurement date, an active programme to:

(a)locate a buyer; or

(b)complete the plan to use the asset for an alternative purpose.

Stakeholder feedback on ED 320 and the Board’s redeliberations

BC52Eleven of the twelve ED respondents to this topic expressed support for modifying AASB 13 to limit the circumstances in which the current use presumption would be rebutted. The respondent who disagreed with any modification to AASB 13 that would constrain identifying a higher and better alternative use of an asset considered that the hypothetical transaction underpinning the fair value concept in AASB 13 should be supported by actual market activity or the generation of actual cash flows that support assumptions about what that market activity might be. They consider that if an asset’s fair value measurement does not reflect its market value, it would inadvertently affect an entity’s assessment of the true cost of the assets being deployed for service delivery.

BC53That respondent was concerned that the ED proposals would affect fair value measurements of some public sector assets due to:

(a)the subjective assessment by an entity’s management of whether an asset is held primarily for its ability to generate net cash inflows;

(b)the decision by the entity’s management about how the asset will be used; and

(c)the notion of a hypothetical not-for-profit public sector entity market participant buyer being ethereal and lacking market activity on which to base a fair value estimate.

BC54In response to that respondent’s concerns, as noted in paragraphs BC31 and BC32, the Board observed that the notion of hypothetical not-for-profit public sector market participant buyers is key to not measuring the fair values of many specialised public sector entity assets at scrap value. This is supported by the IASB’s Basis for Conclusions on IFRS 13, paragraph BC78, which states that “… In effect, the market participant buyer steps into the shoes of the entity that holds that specialised asset.” Also, the IASB noted in paragraph BC79 of its Basis for Conclusions that sometimes an observed market price – one for sale on a stand-alone basis – will not reflect an asset’s fair value (because it does not reflect the value that the specialised asset contributes to the entity, which is achieved by using the specialised asset in combination with other assets).

BC55The Board considered that the IASB’s rationale provides an equivalent precedent for hypothetical not-for-profit public sector market participant buyers existing for public sector entity assets at a higher level of aggregation than the unit of account for observed sales of individual public sector assets. In addition, the Board concluded that fair value estimates for non-financial assets not held primarily for their ability to generate net cash inflows should not depend on the net cash inflows expected to be generated by those assets.

BC56The Board acknowledged the concern (noted in paragraph BC38(b)) that limiting the circumstances in which the current use presumption may be rebutted could result in some fair value measurements being non-compliant with IFRS 13 because they might delay the identification of a higher and better alternative use compared with application of paragraph 29 of IFRS 13 alone.

BC57However, the Board considered that this potential for IFRS non-compliance should be insignificant. This is because the Board considers that a non-financial asset of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows:

(a)often is different in nature from an asset with similar features but held primarily for its ability to generate net cash inflows, because the nature of the benefits it provides is different;

(b)is subject to a different operational (public sector) environment that reduces the likelihood – compared with that of an asset held by a private sector entity – of realising a potential opportunity to be sold for a higher and better alternative use, and therefore reduces the relevance of such an opportunity to assumptions made by market participants when pricing the asset;

BC240The Board did not form a view on whether measuring such restricted land at a low amount or nominal amount would reflect the capacity of the restricted land available to provide benefits to the holder of the land (or to provide services to the community). The Board is undertaking a project to adapt its Conceptual Framework for Financial Reporting (2021) for application by not-for-profit entities, including those in the public sector. The Board plans to consider the description of service potential in the context of an asset of a not-for-profit entity as part of that project. At this stage it is unclear whether that Board consideration would have implications for the measurement of restricted land.

Feedback from public sector stakeholders during outreach

BC241After conducting wide-ranging outreach, including outreach on ITC 45, the Board noted feedback that there is not significant inconsistency in how the fair value of restricted land and improvements on restricted land not held primarily for their ability to generate net cash inflows are being measured. In this regard:

(a)most stakeholders commented that the market approach is used to measure the fair value of land, including land subject to public-sector-specific legal restrictions; whereas improvements on such restricted land are generally considered specialised assets, for which the cost approach is generally applied in measuring their fair value; but

(b)a minority of stakeholders commented that, when a parcel of land of a not-for-profit public sector entity not held primarily for its ability to generate net cash inflows is subject to public-sector-specific legal restrictions, but an equivalent parcel of land with the same public-sector-specific legal restrictions is not obtainable in the marketplace at the measurement date for a price supported by observable market evidence, the fair value of such land should be measured using the cost approach.

BC242The views of these stakeholder groups are elaborated on in paragraphs BC243–BC253.

The minority view regarding land subject to public-sector-specific legal restrictions

BC243The minority of stakeholders mentioned in paragraph BC241(b) considered that the cost approach would be the most appropriate measurement technique for measuring the fair value of restricted land where an equivalent parcel of land subject to the same public-sector-specific legal restrictions is not obtainable in the marketplace at the measurement date for a price supported by observable market evidence. They also commented that if the cost approach is applied, those public-sector-specific legal restrictions would not reduce the fair value of such restricted land to an amount less than the price of equivalent land without those restrictions. This is because, if an equivalent restricted parcel of land is not obtainable in the marketplace, the entity would need to purchase an equivalent parcel of land without those restrictions to continue delivering services, and the existence of such a restriction does not affect the price of this purchase.

BC244Those stakeholders reached this view because they interpreted that, when applying the IASB’s views in IFRS 13 paragraphs BC78–BC79:

(a)many parcels of land might have little value if sold on a stand-alone basis (due to the restrictions), but would have a significant value to the holder of the asset (in terms of the asset’s ability to provide goods or services to beneficiaries) when used together with other non-financial assets; and

(b)the market approach might be inappropriate in measuring the land’s fair value when the market price of the land represents the use of the land on a stand-alone basis rather than in combination with complementary assets.

BC245Further, those stakeholders considered that, because the land subject to public-sector-specific legal restrictions is not held primarily for its ability to generate net cash inflows, it would generally be inappropriate to apply the income approach as an alternative to the market approach and, consequently, the cost approach should be used to measure the fair value of such restricted land.

The majority view regarding land subject to public-sector-specific legal restrictions

BC246The majority of stakeholders mentioned in paragraph BC241(a) expressed the view that land, including land subject to public-sector-specific legal restrictions, should generally be measured using the market approach. They disagree with the view expressed by the minority of stakeholders noted in BC243 – that the cost approach should be applied in measuring such restricted land, and the fair value of such restricted land would not be lower than the price of equivalent land without such restrictions because of the effect of public-sector-specific legal restrictions, if an equivalent restricted parcel of land is not obtainable in the marketplace at the measurement date for a price supported by observable market evidence. Under the market approach, the fair value of a parcel of land should reflect any restrictions on that land, including any public-sector-specific legal restrictions, that would transfer to market participants in a hypothetical sale transaction.

BC247This majority of stakeholders commented that although an ‘equivalent’ parcel of land with the same public-sector-specific legal restrictions might not be obtainable in the marketplace at the measurement date for a price supported by observable market evidence (because public-sector-specific legal restrictions often prevent an entity from selling the land), there are market transactions for other parcels of land that are suitable reference assets. Therefore, those stakeholders consider there are more relevant observable inputs for applying the market approach, rather than the cost approach, in measuring the fair value of land subject to such restrictions.

BC248Some of the stakeholders referred to in paragraph BC247 also commented that any improvements (eg a hospital building) on a parcel of land reduce the land’s service potential. They consider that improvements on land would reduce the options the not-for-profit public sector entity holder of the land has to use the land for another purpose, unless the improvements are demolished.

The Board’s decision not to provide authoritative implementation guidance

BC249Notwithstanding the interpretation of paragraphs BC78 and BC79 of IFRS 13 in paragraphs BC244 and BC245 by a minority of stakeholders, in which they concluded that the cost approach would often be appropriate in measuring the fair value of land subject to public-sector-specific legal restrictions, the Board noted that paragraph 61 of AASB 13 requires an entity to select measurement techniques:

(a)that are appropriate in the circumstances;

(b)for which sufficient data are available to measure fair value; and

(c)that maximise the use of relevant observable inputs and minimise the use of unobservable inputs.

BC250Therefore, the Board considered that determining appropriate measurement techniques for measuring the fair value of an asset is best regarded as relating to detailed valuation assessments and should not be mandated in Australian Accounting Standards. Unless there is significant inconsistency in applying accounting principles in practice, there is no clear case for mandating the use of a particular valuation technique in measuring the fair value of a particular type or class of assets.

BC251Despite the debate regarding fair value measurement of land subject to public-sector-specific legal restrictions, feedback from most stakeholders in targeted outreach and most feedback on ITC 45 indicated that, in practice, the fair value of each type or class of assets affected by this issue is being measured using a largely consistent approach – that is:

(a)for land subject to public-sector-specific legal restrictions, the market approach is used (although, as noted in paragraph BC253 below, at a more detailed level, different methods are being used to calculate the adjustments to reflect restrictions); and

(b)for improvements on such restricted land, the cost approach is generally used, and an adjustment is not deducted to reflect the effect of public-sector-specific legal restrictions because the existence of a public-sector-specific legal restriction does not affect the price that the entity would need to incur to replace the asset at the measurement date.

BC252In addition, the Board noted that paragraph 11 of AASB 13 states that a fair value measurement is for a particular asset; and, therefore, when measuring the fair value of an asset, the entity considers the characteristics of the asset if market participants would take those characteristics into account when pricing the asset at the measurement date, including the condition and location of the asset, as well as any restrictions on the sale or use of the asset. This would include consideration of any public-sector-specific legal restriction that would be transferred to a market participant.

BC253Some stakeholders commented that there is inconsistency in practice regarding the amounts (eg percentages) of adjustments being deducted from the value of land to reflect public-sector-specific legal restrictions, and asked the Board to provide guidance to reduce that inconsistency. Further, some stakeholders informed the Board that different valuers use different methods in calculating the adjustments, for example:

(a)using the price of nearby land not subject to the same public-sector-specific legal restriction and explicitly deducting an adjustment for the effect of the restriction (explicit adjustment); or

(b)using the price of land with a much lower intensity of use – and, consequently, a much lower value – than that of nearby land without a public-sector-specific legal restriction and not explicitly deducting an adjustment for the effect of the restriction because it is implicitly taken into account by using cheaper land in a lower-intensity-of-use location as a reference asset (implicit adjustment).

BC254Since the condition and location of every parcel of land are likely to differ, and the effect of public-sector-specific legal restrictions on fair value measurements of land might vary depending on the likelihood of the restrictions being lifted and whether the land is urban, suburban or rural, the Board considered that it would neither be practical nor appropriate for Australian Accounting Standards to specify the amount of appropriate adjustments (eg in percentage terms) under the market approach to reflect the effect of restrictions that would transfer to market participants.

BC255As noted in paragraph BC234, in deciding not to develop guidance specific to fair value measurement of land subject to public-sector-specific legal restrictions, the Board observed that if the Treasury or Finance Department (or other authority) and/or the Office of Local Government in a jurisdiction desires greater consistency in the valuation approach(es) used to measure the fair value of particular types or classes of non-financial assets in a jurisdiction, it may choose to designate a valuation approach for application to those assets held by public sector entities in its jurisdiction.

Stakeholder feedback on ED 320

BC256A majority of respondents who commented on this topic agreed with the Board’s decision not to mandate the measurement technique to apply for measuring the fair value of specific assets, including land subject to public-sector-specific legal restrictions. However, a few respondents requested the Board to mandate the use of the cost approach in measuring the fair value, or the use of an entity-specific entry price to measure the current value, of all non-financial assets of not-for-profit public sector entities not primarily held for their ability to generate net cash inflows. The Board observed that the feedback received on ED 320 did not identify any supporting or opposing arguments that had not yet been considered by the Board in deciding that fair value should remain the sole current value measurement for non-financial assets and not to mandate the measurement technique to apply for measuring the fair value of specific assets, including restricted land.  

BC257In addition, a few other respondents asked the Board to elevate paragraph IE29 of the IASB’s Illustrative Examples accompanying IFRS 13 (quoted in paragraph BC103) to authoritative guidance. That IASB illustrative example included a comment indicating that restrictions would be taken into account only if they transfer to the market participant buyer, and those respondents envisage that elevating the specific comment to authoritative guidance would effectively preclude the deduction of discounts for restricted land.

BC258The Board observed that the IASB decided to include that example in supplementary supporting material rather than as part of IFRS 13. The IASB stated that its Illustrative Examples illustrate aspects of IFRS 13 but are not intended to provide interpretative guidance. Accordingly, adding such an example in the Board’s implementation guidance (which will be an integral part of AASB 13) would, inappropriately, elevate the status of the IASB example above that accorded to it by the IASB. In addition, it would create a risk that readers interpret the example as a rule of thumb. This is because:

(a)the IASB’s conclusion in the above-mentioned paragraph IE29 of its Illustrative Examples that “the donor restriction on the use of the land” would not be taken into account in the fair value measurement of the land is drawn only after “Upon review of relevant documentation (eg legal and other), the association determines that the fiduciary responsibility to meet the donor’s restriction would not be transferred to market participants if the association sold the asset”; and

(b)that example did not include consideration of the zoning of the land and the likelihood that the zoning would change as stated in paragraph 140.5 of International Valuation Standard IVS 104 Bases of Value.

BC259The Board considered that financial statement preparers, auditors and valuers need to apply judgement, based on the circumstances of each asset, in determining whether a restriction imposed on an asset would transfer to market participants. Therefore, the Board decided not to add that IASB example to AASB 13.

Other measurement issues

BC260Some stakeholders asked the Board to provide guidance regarding the following:

(a)treatment of changes in an asset’s estimated remaining service potential;

(b)treatment of damage of an asset;

(c)allocating the fair value of groups of assets measured under the income approach to component assets;

(d)treatment of deferred maintenance expenditure; and

(e)unit of account for an infrastructure asset.

BC261The Board noted that none of the issues in paragraph BC260 represents a justifiable circumstance under the AASB Not-for-Profit Entity Standard-Setting Framework that would require not-for-profit-specific modifications or guidance. This is because:

(a)those issues are not specific to not-for-profit entities and the IASB did not provide any further guidance on those issues; and

(b)there does not appear to be any gap or other flaw in existing pronouncements that would cause financial statements of not-for-profit public sector entities to inadequately reflect the objectives and qualitative characteristics of financial reporting or not reflect economic reality.

BC262The Board considered that some of those issues relate to detailed valuation assessments, and specific guidance on them should not be included in Australian Accounting Standards. The Board also considered that the treatment of many of the issues would depend on facts and circumstances, and the role of principles-based Standards does not include providing detailed guidance about the various outcomes that can arise.

Effective date and application

Prospective application

BC263In accordance with paragraph 7.9.2 of the AASB Due Process Framework for Setting Standards, the Board decided that the modifications to AASB 13 made by this Standard should be applied prospectively for annual periods beginning on or after 1 January 2024.

BC264The Board noted that the existing Standard was initially required to be applied prospectively, consistent with IFRS 13 Fair Value Measurement. As stated in paragraph BC229 of the Basis for Conclusions on IFRS 13, “… the IASB concluded that a change in the methods used to measure fair value would be inseparable from a change in the fair value measurements (ie as new events occur or as new information is obtained, eg through better insight or improved judgement) ... Therefore, the IASB concluded that IFRS 13 should be applied prospectively (in the same way as a change in accounting estimate).” For the same reason, the Board decided that the modifications to AASB 13 should be applied prospectively.

BC265The Board considered that the modifications to AASB 13 mainly clarify that Standard, rather than changing its requirements. In applying the modifications, an entity’s changing practice in how it measures the fair value of non-financial assets not held primarily for their ability to generate net cash inflows does not indicate an error had been made previously in applying the existing requirements of AASB 13.

BC266In accordance with paragraphs 37–40 of AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors, prospective application of the authoritative implementation guidance would require an entity to:

(a)recognise any change in asset values by adjusting the carrying amount of the affected assets and equity items in the period of the change; and

(b)disclose the nature and amount of the change in asset values that has an effect in the current period or is expected to have an effect in future periods, except for the disclosure of the effect on future periods when it is impracticable to estimate that effect.

Voluntary restatement of comparative information

BC267In ED 320, the Board invited comments on whether an option should be provided for not-for-profit public sector entities to elect to restate comparative information to the extent practicable, instead of applying the amendments to AASB 13 prospectively. A majority of those responding to that question disagreed with the provision of such an option, because:

(a)restating comparative information about fair values for prior periods would be likely to involve the use of hindsight;

(b)a change in fair value should be treated as a change in an accounting estimate (ie prospectively); and

(c)it might be confusing for users to understand the fair values presented in financial statements if prior period balances were restated, which would have a flow-on effect to the depreciation amounts previously recognised.

BC268Having regard to the comments received, the Board decided not to provide an option to restate comparative information upon initial application of the Amending Standard.

Not-for-profit private sector entity consideration

BC269When developing ED 320, the Board observed that limiting the AASB 13 modifications to not-for-profit entities in the public sector might be perceived as being inconsistent with its transaction neutrality policy. Therefore, ED 320 included a question asking respondents whether the proposed modifications to AASB 13 should be applicable also to entities in the not-for-profit private sector. Mixed feedback was received on that ED question.

BC270The Board decided to limit the scope of this Amending Standard to not-for-profit public sector entities because the Board did not receive any requests for guidance from stakeholders in the not-for-profit private sector during the project. To the date of issuing this Standard, the Board has not been informed that:

(a)a significant number of not-for-profit private sector entities measure their non-financial assets at fair value;

(b)not-for-profit private sector entities are encountering significant issues with applying AASB 13 in measuring non-financial assets; or

(c)some principles of AASB 13 have been applied inconsistently in this sector in measuring non-financial assets (unlike in the public sector).

BC271The Board noted that limiting the scope of modifications to not-for-profit public sector entities may not necessarily breach its transaction neutrality policy because many assets held by not-for-profit public sector entities are largely unique to the public sector. That is, for many assets, it is unlikely that private sector entities would hold similar assets to those held in the public sector.

BC272Even if it were considered that limiting the modifications to not-for-profit public sector entities would be inconsistent with the transaction neutrality policy, the Board considered that this would be justified. This is because, unlike public sector entities, private sector entities have a choice to subsequently measure their non-financial assets using the cost model rather than the revaluation model (in AASB 116 or AASB 138 Intangible Assets). This results in non-financial asset values measured using different models among private sector entities’ financial statements, thus being less comparable than the asset values reported by public sector entities. Accordingly, applying this Amending Standard, which is limited to measuring non-financial assets using the revaluation model, would not fully achieve comparability among not-for-profit private sector entities in measuring their non-financial assets.

BC273In accordance with the AASB Not-for-Profit Entity Standard-Setting Framework, for the reasons noted in paragraphs BC270–BC272, the Board determined that a case has not been made for it to undertake standard-setting work to investigate whether there is a need to modify AASB 13 for application by not-for-profit private sector entities.