Impairment of assets – Non-Cash Generating Assets (PBE IPSAS)

Client Substantiation File.

Current New Zealand Generally Accepted Accounting Practice (GAAP) for PBE’s

Current NZ Generally Accepted Accounting Practice is set out in PBE IPSAS 21 Impairment of non-cash generating assets. The standard applies to tier 1 and 2 public benefit entities and would relate to:

  • property, plant and equipment;
  • intangibles; and
  • investments in entities measured at cost.

Overview

The standard requires an entity to recognise impairment when its assets are carried at more than their recoverable service amount. The standard prescribes procedures that an entity has to apply to ensure assets are carried at no more than their recoverable service amount as illustrated below.

Procedure for Non-cash generating assets.

Key definitions

Impairment: A loss in the future economic benefits or service potential of an asset, over and above the systematic recognition of the loss of the asset’s future economic benefits or service potential through depreciation.

Impairment loss of a non-cash generating asset: The amount by which the carrying amount of an asset exceeds its recoverable service amount.

Carrying amount: The amount at which an asset is recognised in the statement of financial position, after deducting any accumulated depreciation and accumulated impairment losses thereon.

Recoverable service amount: it is the higher of a non-cash-generating asset’s fair value less costs to sell and its value in use.

Fair value less costs to sell: is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.

Value in use: is the present value of the asset’s remaining service potential.

So how do you apply the requirements of PBE IPSAS 21 to your entity?

In terms of PBE IPSAS 21 at each reporting date, an entity is required to assess whether there is an indication that an asset may be impaired. A list of external and internal impairment indicators are described by the standard. If there’s an indication that the entity’s asset(s) may be impaired then the asset(s) recoverable service amount must be estimated.

Irrespective of whether there is any indication of impairment, an entity shall also test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually by comparing its carrying amount with its recoverable service amount.

Examples of impairment indicators:

  • External sources of information:
  • cessation, or near cessation, of the demand or need for services provided by the asset; and
  • significant long-term adverse changes expected in terms of technological advances, market, economic or legal environment.

Internal sources of information

  • obsolescence and/or physical damage;
  • significant changes; expected and occurred, in the entity making assets idle assets, restructuring, discontinuing or restructuring of the operations to which an asset belongs;
  • a decision to halt the construction of the asset before it is complete or in a usable state; and
  • internal evidence that the performance of an asset will be worse than expected.

These examples provided above are not intended to be exhaustive.

Measuring recoverable service amount

It is not always necessary to determine both an asset’s fair value less costs to sell and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired, and it is not necessary to estimate the other amount.

Fair value less costs of disposal

The best evidence of an asset’s fair value less costs to sell is the price in a binding sale agreement in an arm’s length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset.

If there is no binding sale agreement but an asset is traded in an active market, fair value less costs to sell is the asset’s market price less the costs of disposal.

If there is no binding sale agreement or active market for an asset, fair value less costs to sell is based on the best information available that reflects the amount that an entity could obtain, at the reporting date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal.

Costs of disposal are the direct incremental costs to dispose of the asset.

Value in use

The present value of the remaining service potential of the asset is determined using any one of the approaches described below:

Depreciated Replacement Cost Approach - the present value of the remaining service potential of an asset is determined as the depreciated replacement cost of the asset. The replacement cost of an asset is the cost to replace the asset’s gross service potential. This cost is depreciated to reflect the asset in its used condition.

Restoration Cost Approach - is the cost of restoring the service potential of an asset to its pre-impaired level. The present value of the remaining service potential of the asset is determined by subtracting the estimated restoration cost of the asset from the current cost of replacing the remaining service potential of the asset before impairment.

Service Units Approach - the present value of the remaining service potential of the asset is determined by reducing the current cost of the remaining service potential of the asset before impairment to conform to the reduced number of service units expected from the asset in its impaired state.

Recognition of an impairment loss

If, and only if, the recoverable service amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable service amount. That reduction is an impairment loss. An impairment loss shall be recognised immediately in surplus or deficit.

Reversal of impairment

An entity shall assess at each reporting date whether there is any indication that an impairment loss recognised in prior periods for an asset may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable service amount of that asset.

The same approach is followed for the identification of impaired assets i.e. assess at the end of each period end whether there is an indication that an impairment may have decreased using the indicators discussed above. If there’s evidence of a decrease in impairment calculate the recoverable service amount.

An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable service amount since the last impairment loss was recognised. If this is the case, the carrying amount of the asset shall be increased to its recoverable service amount. That increase is a reversal of an impairment loss.

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.

A reversal of an impairment loss for an asset other than goodwill shall be recognised immediately in surplus or deficit. After a reversal of an impairment loss is recognised, the depreciation (amortisation) charge for the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

Re-designation of assets

The re-designation of an asset from cash-generating asset to a non-cash- generating asset or from a non-cash-generating asset to a cash-generating asset shall only occur when there is clear evidence that such a re-designation is appropriate. A re-designation, by itself, does not necessarily trigger an impairment test or a reversal of an impairment loss.

What are the disclosure requirements required by PBE IPSAS 21?

An entity shall disclose the criteria developed by the entity to distinguish non-cash-generating assets from cash-generating assets.

Disclosure by class of assets:

  • impairment losses recognised in surplus or deficit ;
  • impairment losses reversed in surplus or deficit; and
  • which line item(s) of the statement of comprehensive revenue and expense are the impairment loses and reversals included.

Other disclosures:

An entity shall disclose the following for each material impairment loss recognised or reversed during the period:

  • events and circumstances resulting in the impairment loss;
  • amount of the impairment loss or reversal;
  • the nature of the asset;
  • whether the recoverable service amount is its fair value less costs to sell or value in use;
  • if the recoverable service amount is fair value less costs to sell, the basis used to determine fair value less costs to sell; and
  • if the recoverable service amount is value in use, the approach used to determine value in use.

Recognition of impairment losses and reversals

Management is responsible for the identification and disclosure of impairment losses and reversals. This responsibility requires management to implement adequate accounting and internal control systems to ensure that impairment is appropriately identified and disclosed, where appropriate, in the financial reports.

Management would normally engage an expert firm to determine the fair value less costs to disposal and the value in use, it is managements’ responsibility to ensure that the information provided to the expert is complete and accurate. Where management has performed the calculation of the value in use there should be adequate evidence to support the assumptions made by management.

Systems for identifying and monitoring impairment assessment

We expect entities to establish systems and internal controls to:

  • perform cyclical counts of assets and maintain an up-to-date fixed asset register of all assets;
  • identify, account for, monitor and disclose impairment in accordance with the applicable financial reporting framework (PBE IPSAS 21);
  • review and approve the expert reports and calculations prepared for the value in use and the expert reports for the fair value less disposal costs assessments; and
  • formally authorise and approve the assessments that have been prepared.