Bed licences

Bed licences - Have you reviewed carrying amounts and estimated useful lives in 30 June 2021 financial statements?

Since announcing in the May 2021 Federal Budget that bed licences for aged care providers are to be scrapped from 1 July 2024, there has been much debate about whether bed licences recognised as intangible assets with indefinite useful lives in the financial statements of aged care providers should be:

  • Tested for impairment at 30 June 2021 given that they are unlikely to have much resale value in future
  • Amortised over their remaining useful lives to 30 June 2024 (i.e. They are no longer an indefinite-lived intangible asset), but also tested for impairment if there are impairment indicators, or
  • Left as is.

Under the proposed new arrangements, the number of places provided by an aged care provider will be driven by demand from senior Australians with an assigned place, rather than an assigned bed licence.

ASIC FAQ 9D – Impair and re-estimate useful life

Because of this diversity in practice, ASIC has weighed into the debate, and on 29 September 2021, issued FAQ 9D. FAQ 9D states that aged care providers should review the carrying amount of bed licences on their balance sheets for 30 June 2021 and in the lead up to 1 July 2024, including an impairment review, and a review of their remaining estimated useful lives. This is in light of:

Although the relevant legislation to scrap bed licences may not be passed before the next Federal election in 2022, FAQ 9D notes that there is broad industry support for the changes (i.e. they will happen). In addition, at this stage there are no plans to compensate providers for the removal of the licences because licences are provided at no cost, and for businesses providing quality care it will be ‘business as usual’. ASIC therefore does not expect bed licences to have a useful life beyond 1 July 2024. As such, age care providers need to consider for 30 June 2021 financial statements, whether:

  1. To reassess the amortisation period for bed licences - previously these would have had an indefinite useful life, and would require an amortisation adjustment for 2 months out of a remaining useful life of 38 months (assuming the May 2021 Budget announcement is the trigger for reassessment)
  2. To impair the bed licences (refer to FAQ 9D for more information)
  3. To disclose any significant accounting judgements and any sources of estimation uncertainty.

Should we amortise and impair bed licences at 30 June 2021?

Some argue that legislation to remove bed licences has not yet been passed, and that there was insufficient information to formally require a reassessment of useful lives and impairment at 30 June 2021. On this basis, some aged care providers that have already lodged financial statements with a regulator provided only subsequent event disclosure about what might happen to bed licences in 2024.

At the same time, others argue that this is a ‘fait accompli’, it will happen, and it is just a matter of working out the finer details of how the new system will work. Bed licences should therefore be assigned a limited useful life from May 2021 because expectations about useful life changed with the Budget announcement in May 2021. Previously, bed licences would have been considered to have an indefinite useful life. In addition, bed licences should be impaired if the change in the system could have an adverse effect on the operator’s business.

Another way of looking at the September 2021 Discussion Paper is that it is an adjusting event for 30 June 2021 reporting periods because it provides additional information in relation to the May 2021 Budget announcement.

BDO’s preferred view is that in 30 June 2021 financial statements, the useful lives of bed licences should be reconsidered, and the carrying amount tested for impairment because:
  • The May 2021 Budget announcement, together with other public information available up to 30 June 2021, are sufficient to conclude that bed licences no longer have indefinite useful lives, and/or
  • The September 2021 Discussion Paper is an adjusting event for 30 June 2021 reporting periods as it provides additional information in relation to the May 2021 Budget announcement.

The alternative view is that there was insufficient public information regarding the scrapping of bed licences available at 30 June 2021, and therefore any changes to amortisation periods of bed licences, and/or possible impairment, are non-adjusting events, and therefore disclosed, but not accounted for, in 30 June 2021 financial reports.

Can we reallocate bed licences acquired in a past business combination to goodwill?

Lastly, it is important to note that FAQ 9D says you can’t simply retrospectively reallocate bed licences to goodwill if they were acquired as part of a past business combination. Instead, they will need to be amortised, and impaired, if required.

Need help?

Please consult with IFRS Advisory if you require assistance.