The AASB’s initial deliberationsThe AASB’s initial deliberations

## The AASB’s initial deliberations 1. The AASB noted that DRC is identified as a measure of fair value in paragraph 33 to AASB 116 (July 2004) in cases where there is no market-based evidence of fair value because of the specialised nature of the asset and the item is rarely sold, except as part of a continuing business. The AASB also noted that, with the publication of AASB 13, CRC plays a similar role for assets that are specialised in nature and are rarely sold, such as many assets held by public sector entities. The AASB further noted that the cost of disposal of such assets is not expected to be material. 2. The AASB noted that fair value under AASB 13 is defined as an exit price. Therefore, CRC under AASB 13 is conceptually different from DRC as a measure of value in use under AASB 136, being an entry price. The AASB noted, however, that: 1. the description of the cost approach in AASB 13 indicates that CRC incorporates obsolescence as does the definition of DRC under AASB 136, where accumulated depreciation encompasses obsolescence; 2. valuers use similar approaches in determining DRC and CRC. Factors such as physical obsolescence, functional obsolescence and economic obsolescence are all considered in determining each measure; and 3. valuers’ practice involves considering as a starting point whether the valuation is of a specialised asset in its current use or an alternative use and whether there are any restrictions on the use of the asset. 3. The AASB concluded that DRC as a measure of value in use of specialised assets that are rarely sold is unlikely to be materially different from DRC (or CRC) as a measure of fair value of such assets. This is because, for non-cash-generating specialised assets, the market is typically inactive and their highest and best uses would usually be their current uses rather than their sale, resulting in CRC of such assets being not materially different from their DRC, as the following example shows: Example An entity self-constructs a specialised facility. Because this is the entity’s specific practice in its industry, it can construct the facility for $8.5 million, whereas the cost of construction of the facility to any other market participant would be $10 million. As the construction of the facility has just been completed, there is no obsolescence or depreciation. The issues are: (a) whether the CRC of the facility should be measured at $10 million or $8.5m under AASB 13; and (b) whether the DRC of the facility should be measured at $10m or $8.5m under AASB 136. Analysis Paragraph B9 to AASB 13 states that “a market participant buyer would not pay more for an asset than the amount for which it could replace the service capacity of that asset”. The implication of that statement depends on whether the market participant buyer includes, or has the attributes of, the vendor. Paragraph BC78 of the IASB’s Basis for Conclusions on IFRS 13 Fair Value Measurement states that, in relation to a specialised non-financial asset, “In effect, the market participant buyer steps into the shoes of the entity that holds that specialised asset” (emphasis added). Based on that comment, it seems appropriate in the above example to regard the market participant buyer as being capable of self-constructing the asset for $8.5 million, in which case CRC should be measured at $8.5 million under AASB 13\. Because value in use is an entity-specific measure, the DRC of the facility would also be measured at $8.5 million under AASB 136. 1. The AASB noted that, when the AASB 136 impairment model (as per IAS 36) is applied to non-cash-generating specialised assets that are rarely sold, the value in use of the asset is typically less than its net fair value because the asset is generally held for continuing use of its service capacity, not the generation of cash inflows. Further, because these assets are rarely sold, their cost of disposal is typically negligible. The AASB concluded that, in such circumstances, the recoverable amount of the asset would be materially the same as fair value determined under AASB 13. 2. The AASB noted that AASB 13 has addressed the concerns identified in paragraph BC4 above that the net fair value of an asset could be regarded as relating to a scrap value for a specialised asset leading to an inappropriate recognition of impairment. Paragraph BC78 of the IASB’s Basis for Conclusions on IFRS 13 refers to the concerns that an exit price would be based on scrap value (particularly given the requirement to maximise the use of observable inputs, such as market prices) and not reflect the value that an entity expects to generate by using the asset in its operations. It notes that, in such circumstances, the scrap value for an individual asset would be irrelevant because an exit price reflects the sale of the asset to a market participant that has, or can obtain, the complementary assets and the associated liabilities needed to use the specialised asset in its own operations. In effect, the market participant buyer steps into the shoes of the entity that holds that specialised asset. 3. The AASB noted that, with the issuance of AASB 13, the fair value of non-financial assets is determined under that Standard. Accordingly, with the CRC measure being available under AASB 13, the notion of DRC included in AASB 116 (July 2004) would no longer be applicable in estimating the fair value of specialised non-financial assets. ED 269 proposals 1. The AASB published ED 269 Recoverable Amount of Non-cash-generating Specialised Assets of Not-for-Profit Entities proposing that: 1. references to DRC as a measure of value in use in AASB 136 be deleted from that Standard; and 2. paragraph Aus5.1 be included in AASB 136 to clarify that, because primarily non-cash-generating specialised assets held for continuing use of their service capacity are rarely sold, their cost of disposal is typically negligible and, accordingly, the recoverable amount of such assets is expected to be materially the same as fair value, determined under AASB 13. 2. The Board noted with the removal of DRC as a measure of value in use from AASB 136, the recoverable amount of a primarily non-cash-generating specialised asset held by an NFP entity for continuing use of its service capacity is determined as the higher of value in use and net fair value. The recoverable amount would be fair value since the value in use of a primarily non-cash-generating asset would be small or close to zero. 3. The ED 269 proposals identified implications for assets held both under the revaluation model and under the cost model as outlined below: Revaluation model NFP entities that regularly revalue their primarily non-cash-generating specialised assets to fair value would find the application of the impairment model under AASB 136 redundant. Cost model If there are indicators of impairment, NFP entities applying the cost model to their primarily non-cash-generating specialised assets would need to determine their recoverable amounts at fair value to establish whether there is a need to recognise impairment.