The need to issue AASB 2016-4The need to issue AASB 2016-4

## The need to issue AASB 2016-4 1. Clarifications were sought by some constituents about the interaction between the notion of DRC for determining the value in use of assets held by NFP entities in the circumstances described in paragraph BC3 and the notion of current replacement cost (CRC) as a measure of the fair value of an asset under the cost approach in AASB 13 Fair Value Measurement. AASB 13 (paragraphs B8 and B9) identifies the cost approach as a valuation technique for measuring fair value. Under AASB 13, the cost approach reflects the amount that would be required currently to replace the service capacity of an asset. 2. Some commentators argued that, consistent with the role of CRC as a measure of fair value under AASB 13 (reflecting the assumptions that market participants would use when pricing the asset), DRC should not be an entity-specific measure of recoverable amount under AASB 136\. These commentators supported the objective of the existing requirements of AASB 136 of not basing the recoverable amount of primarily non-cash-generating assets held by NFP entities on discounted cash flows. They also noted that when DRC was included in AASB 116 Property, Plant and Equipment (July 2004), there was ambiguity as to whether it was a measure of fair value or a measure of value in use and that with the publication of AASB 13 and its exposition of the cost approach, it became clear that DRC under the AASB 116 is a measure of fair value as is CRC under AASB 13. Accordingly, for such assets, they argued that DRC should be used to determine fair value as a measure of recoverable amount and noted that its designation as a measure of value in use under AASB 136 might be a source of confusion. 3. Other commentators argued 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. They noted that, with the publication of AASB 13, the cost approach plays a similar role as a measure of fair value when the market and income approaches to valuation are not applicable due to the specialised nature of the asset. 4. Further comments on the interaction between DRC under AASB 136 and CRC under AASB 13 were sought in AASB outreach with key stakeholders, such as preparers and auditors, and valuers of NFP entities’ assets, particularly in regard to assets held by public sector entities. 5. Comments from some preparers in the public sector who participated in the outreach indicated that separate evaluations of CRC as a measure of fair value under AASB 13 and DRC as a measure of value in use under AASB 136 are not usually performed. These commentators noted that, although CRC as a measure of fair value under AASB 13 and DRC as a measure of value in use under AASB 136 are different in concept, for specialised assets where the market is typically inactive, the highest and best use is generally their current use. Accordingly, in their view the CRC of such assets under AASB 13 and their DRC under AASB 136 are, in practice, interchangeable. Some noted one reason for this outcome is that highest and best use requires consideration of reasonably possible uses, not every possible use. 6. Some valuers participating in staff outreach noted: 1. in the case of a NFP entity where the fair value of a specialised asset is based on the cost approach, the entity acts as the ‘buyer’ and is competing with other market participants in order to acquire the asset. They argue that this means CRC under AASB 13 should not be different from DRC under AASB 136; 2. CRC under AASB 13 and DRC under AASB 136 are regarded as similar measures of fair value and the existing use or alternative uses are considered and assessed on a case-by-case basis; and 3. the highest and best use of an asset determines its fair value, but restrictions (such as legal restrictions) on the use of an asset often mean that the highest and best use of an asset is its current use.