Simplified impairment requirements for NFPs – no more assessment of depreciated replacement cost

The Australian Accounting Standards Board (AASB) recently issued amendments to AASB 136 Impairment of Assets (AASB 2016-4 Amendments to Australian Accounting Standards – Recoverable Amount of Non-Cash-Generating Specialised Assets of Not-for-Profit Entities) meaning that not-for-profit entities (NFPs) measuring specialised, non-cash-generating assets using the fair value model will, in future, no longer be required to perform impairment testing under AASB 136.

‘NFP public sector entities holding non-cash-generating specialised assets at fair value in accordance with AASB 13 Fair Value Measurement no longer need to consider AASB 136 Impairment of Assets. NFP entities (such as charities) holding such assets at cost will determine recoverable amounts using current replacement cost in AASB 13. The proposed amendments will simplify and clarify impairment testing for all NFPs.’

Quote by Kris Peach, Chair of the AASB (Media Release 30 June 2016)

Why the change?

To date there has been confusion amongst preparers, auditors and valuers about whether ‘depreciated replacement cost’ under AASB 136 and ‘current replacement cost’ under AASB 13 mean the same thing.

’The amendments are long overdue as stakeholders have been confused about how current replacement cost as a measure of fair value under AASB 13 and depreciated replacement cost as a measure of value in use under AASB 136 interact’.

Quote by Kris Peach, Chair of the AASB (Media Release 30 June 2016)

The AASB believe that there is no difference between ‘depreciated replacement cost’ (AASB 136) and ‘current replacement cost’ (AASB 13), and that both concepts would require consideration of obsolescence, including the intention to scrap assets:

  • Depreciated replacement cost in AASB 136 – via accumulated depreciation
  • Current replacement cost in AASB 13 – via technical and economic obsolescence (AASB 13, paragraph B9).

What’s changed?

To simplify the AASB 136 impairment requirements for NFPs with these specialised, non-cash-generating assets, the AASB has therefore amended AASB 136 by deleting:

  • Paragraph Aus 6.1 which makes reference to ‘depreciated replacement cost’ as a proxy for ‘value in use’ when the future economic benefits of the asset are not primarily dependent on the asset’s ability to generate net cash inflows and where the entity would, if deprived of the asset, replace its remaining future economic benefits
  • The definition of ‘depreciated replacement cost’ in paragraph Aus 6.2
  • Paragraphs Aus 32.1 and Aus 32.2.

Paragraph Aus 5.1 has also been added to explain that given that assets of NFPs, which are not held to primarily generate cash inflows, are rarely sold, their cost of disposal is typically negligible. Accordingly, the recoverable amount of these assets is expected to be materially the same as fair value determined under AASB 13.

What does this mean in practice?

These changes should simplify the impairment assessment because preparers can basically bypass the ‘value in use’ assessment and go straight to the current replacement cost fair value model in AASB 13, ignoring disposal costs as these would usually be negligible.

However, as the AASB noted, ‘current replacement cost’ reflects obsolescence (which according to AASB 13, paragraph B9 includes physical deterioration, and  functional and economic obsolescence). NFPs will need to pay attention to values assigned by valuers to ensure that, where ‘current replacement cost’ is used in assessing fair value of their assets, it properly reflects the requirements of AASB 13.

When do these changes become effective?

The amendments apply to annual periods beginning on or after 1 January 2017.