AASB makes decisions about fair value measurement by not-for-profit public sector entities

In our May 2022 newsletter, we discussed the Australian Accounting Standards Board’s (AASB’s) proposals contained in ED 320 Fair Value Measurement of Non-Financial Assets by Not-for-Profit Public Sector Entities (ED 320). ED 320 proposed that authoritative implementation guidance be added to AASB 13 Fair Value Measurement for three areas that have previously given rise to divergence in practice by not-for-profit (NFP) public sector entities, namely:

• Market participant assumptions
• Highest and best use
• Application of the cost approach.

At its September 2022 meeting, the AASB considered feedback received on ED 320. It made the following decisions about changes to AASB 13 for NFP public sector entities measuring non-financial assets not held primarily for their ability to generate net cash inflows.

Market participant assumptions

When using market participant assumptions to measure fair value (including if the cost approach is applied), the AASB decided that if both of the following were not observable, changes to AASB 13 would require an entity to use its own assumptions as a starting point, and to adjust those assumptions if reasonably available information indicates that other market participants would use different data:

• Market selling price of a comparable asset, and
• All other market participant data required to measure fair value.

Highest and best use

AASB 13 would be amended to specify that the asset’s current use is presumed to be its highest and best use, unless it is highly probable that the asset will be sold, distributed, or used for an alternative purpose to its current use at the measurement date. Current use is also presumed to be highest and best use for an asset that will be disposed of by the NFP public sector entity unless the asset qualifies as ‘held for sale’ under AASB 5 Non-current Assts Held for Sale and Discontinued Operations.

When considering highest and best use, AASB 13 would also be amended to clarify that an asset’s alternative use is ‘financially feasible’ if market participants would be willing to invest in the asset’s service capacity, considering the asset’s ability to be used to provided needed goods and services to beneficiaries, and the resulting cost of those goods and services.

Application of the cost method

When applying the cost approach to measure fair value of the subject asset (i.e. asset being measured at fair value), the NFP public sector entity estimates costs currently required for a market participant buyer to acquire or construct a reference asset (hypothetical asset).

In this regard, the AASB decided that modifications to AASB 13 would require the NFP public sector entity to assume the hypothetical asset will be acquired or constructed at the subject asset’s existing location.

The AASB also decided that the following costs are required to be included in the hypothetical asset’s replacement cost if they would need to be incurred upon the hypothetical acquisition or construction of the hypothetical asset at the measurement date, and if data for such costs are reasonably available:

• Costs required to restore another entity’s asset if the asset requiring restoration existed at the measurement date and would be disturbed in a hypothetical acquisition or construction of the hypothetical asset. Such costs would not be included if they relate to restoration of an asset of another entity included in the consolidated group to which the NFP public sector belongs
• Other disruption costs that would be hypothetically incurred when acquiring or constructing the hypothetical asset at the measurement date
• If the subject asset is fixed to a parcel of land, and the land available in the proximity of the subject asset has features needing removal or remediation that the subject asset does not have:
  • Costs required to prepare the land for the hypothetical construction of the hypothetical asset
  • Costs required to remove and dispose of any unwanted existing structures on the land to make way for the hypothetical construction of the hypothetical asset.

Economic obsolescence

Lastly, modifications to AASB 13 will specify that any surplus capacity of the asset that is necessary for stand-by or safety purposes is not considered to represent economic obsolescence.

Next steps

The AASB will be issuing a Fatal Flaw Review (FFR) Draft version of the amending Standard for a 30-day comment period. The FFR Draft is expected to be approved out of session in mid-October 2022.

The amending Standard will not mandate particular measurement techniques for measuring fair value of non-financial assets not held primarily to generate net cash inflows. It will only apply to public sector NFPs and will apply prospectively to annual periods beginning on or after 1 January 2024, with early application permitted.

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