By Adam Thomas
Generally speaking, most of our infrastructure-rich organisations are required by Australian Accounting Standard AASB 136 Impairment of Assets to review their assets annually for indicators of impairment in service capacity and therefore value.
AASB lists the following indicators to look for:
- Abnormal market value decline: The market value has decreased more than would be expected as a result of time or normal use
- Adverse business environmental changes: Significant technological, market, economic or legal changes that have an adverse effect on the entity during the reporting period, or will take place in the near future
- Interest rate movements: Increase in market rates during the reporting period that are likely to affect the discount rate used in calculating an asset’s value in use and decrease its recoverable amount
- Market capitalisation reduction: The carrying amount of net assets of the entity is greater than its market capitalisation
- Obsolescence or physical damage: Evidence of obsolescence or physical damage of an asset
- Unfavourable changes within the entity: Significant changes that have an adverse effect on the entity during the reporting period, or will take place in the near future, or in the manner in which the asset is used
- Adverse internal performance information: Information that indicates the economic performance of the asset has deteriorated, or will deteriorate over that previously expected
Where one or more such indicators exist for any assets, AASB 136 requires an impairment writedown to be made to the value of the asset. Should the indicator no longer exist in the future, the writedown is then reversed.
Exemption for some public sector infrastructure:
AASB 136 provides an exemption from impairment testing for many items of public sector infrastructure, being assets not held primarily for their ability to generate net cash inflows (typically specialised assets held for use of their service capacity) that are regularly revalued to fair value under the revaluation model.
For many councils, this means most infrastructure is exempt from impairment indicator reviews and value adjustments under AASB 136.
Impairment reviews by another name:
While there is some relief from the requirements of AASB 136, many local and state government regulatory agencies in Australia have in place requirements for their agencies to undertake an annual fair value review of some or all their assets – to assess fair value movements as at 30 June and make valuation adjustment as required. These reviews can be as simple as reviewing movements in cost indices but also generally involve looking for major changes in service capacity (aka the impairment indicators). These annual fair value reviews effectively reinstate the substance of the requirement to assess impairment indicators and make value adjustments to individual assets where needed.
For example, the annual fair valuereview is a requirement of Appendix E of the NSW Code of Accounting Practice and Financial Reporting. For Victoria, FRD 103 Non-financial physical assets, clause 4.5 says similar and even refers to reviewing impairment indicators as part of the assessment of fair value. In Queensland, NCAP 3 – Valuation of Non-Current Assets, section 3.6.1 places the same annual review/valuation obligation on agencies, even requiring that any changes in an asset’s service must be reflected in the specific annual valuation for that asset. NCAP 3 lists the factors to consider, acknowledging they are similar to the impairment indicators
The result of all this – councils should investigate their state agency asset reporting requirements and, if necessary, start collecting information on any impairment indicators that exist. In most cases, the focus will be on obsolescence or physical damage to infrastructure which may still have service impacts on an asset as at 30 June.
