grap 21 impairment of non-cash-generating assets (march 2009) · pdf filegrap 21 issued march...

Issued by the Accounting Standards Board

March 2009

ACCOUNTING STANDARDS BOARD

STANDARD OF GENERALLY RECOGNISED ACCOUNTING PRACTICE

IMPAIRMENT OF NON-CASH-GENERATING ASSETS

(GRAP 21)

GRAP 21

Issued March 2009 Impairment of Non- cash-generating Assets

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Acknowledgement

This proposed Standard of Generally Recognised Accounting Practice (GRAP) is drawn primarily from the International Public Sector Accounting Standard (IPSAS) on

Impairment of Non-Cash-Generating Assets issued by the Federation of Accountants’ International Public Sector Accounting Standards Board (IPSASB). The International

Federation of Accountants (IFAC) was founded in 1977 with its mission to develop and enhance the profession with harmonised standards. IPSASB has issued a

comprehensive body of IPSASs, which will be used to produce future Standards of GRAP. Extracts of the IPSAS on Impairment of Non-Cash-Generating Assets are

reproduced in this Standard of GRAP with the permission of the IPSASB.

The approved text of the IPSASs is that published by the IFAC in the English language. The IPSASs are contained in the IFAC Handbook of International Public Sector

Accounting Pronouncements and are available from:

International Federation of Accountants

545 Fifth Avenue, 14th Floor

New York, New York 10017 USA

Internet: http://www.ifac.org

Copyright on IPSASs, exposure drafts and other publications of the IPSASB are vested in IFAC and terms and conditions attached should be observed.

Accounting Standards Board

P.O. Box 74129

Lynnwood Ridge

0040

Copyright ©2009 by the Accounting Standards Board

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical,

photocopying, recording, or otherwise, without the prior permission of the Accounting Standards Board.

Permission to reproduce limited extracts from the publication will not usually be withheld.

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Contents

Standard of Generally Recognised Accounting Practice

Impairment of Non-cash-generating Assets

Paragraphs

Introduction

Objective .01

Scope .02 – .08

Definitions .09 – .16

Cash-generating assets and non-cash-generating assets .10 – .14

Depreciation .15

Impairment .16

Identifying an asset that may be impaired .17 – .28

Measuring recoverable service amount .29 – .46

Measuring the recoverable service amount of an intangible asset with an indefinite useful life

.34

Fair value less costs to sell .35 – .39

Value in use .40

Depreciated replacement cost approach .41 – .43

Restoration cost approach .44

Service units approach .45

Application of approaches .46

Recognising and measuring an impairment loss .47 – .54

Reversing an impairment loss .55 – .69

Redesignation of assets .70 – .71

Disclosure .72 – .79

Transitional provisions .80

Effective date .81

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Appendix A – Flowchart to determine an impairment loss for non-cash-

generating assets

Appendix B – Indications of impairment – examples

Appendix C – Measurement of impairment loss - examples

Appendix D – Consequential amendments to other Standards of GRAP

Basis for conclusions

Comparison with the International Public Sector Accounting Standard on Impairment of Non-Cash-Generating Assets (February 2007)

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IMPAIRMENT OF NON-CASH-GENERATING ASSETS

Introduction

Standards of Generally Recognised Accounting Practice

The Accounting Standards Board (the Board) is required in terms of the Public Finance Management Act, Act No. 1 of 1999, as amended (PFMA), to determine generally recognised accounting practice referred to as Standards of Generally Recognised Accounting Practice (GRAP).

The Board must determine GRAP for:

(a) departments (national and provincial);

(b) public entities;

(c) constitutional institutions;

(d) municipalities and boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality; and

(e) Parliament and the provincial legislatures.

The above are collectively referred to as “entities”.

The Board has approved the application of Statements of Generally Accepted Accounting Practice (GAAP), as codified by the Accounting Practices Board and issued by the South African Institute of Chartered Accountants, to be GRAP for:

• government business enterprises (as defined in the PFMA);

• trading entities (as defined in the PFMA);

• any other entity, other than a municipality, whose ordinary shares, potential ordinary shares or debt are publicly tradable on the capital markets; and

• entities under the ownership control of any of these entities.

The Board believes that Statements of GAAP are relevant and applicable to financial statements prepared by all such entities, including those under their ownership control.

Financial statements should be described as complying with Standards of GRAP only if they comply with all the requirements of each applicable Standard of GRAP and any related Interpretations of the Standards of GRAP.

Any limitation of the applicability of specific Standards or Interpretations is made clear in those Standards or Interpretations of the Standards of GRAP.

The Standard of GRAP on Impairment on Non-cash-generating Assets is set out in paragraphs .01 to .81. All paragraphs in this Standard of GRAP have equal authority. The status and authority of appendices are dealt with in the preamble to each appendix. This Standard should be read in the context of its objective, its basis for conclusions if applicable, the Preface to Standards of GRAP, the Preface to the Interpretations of the Standards of GRAP and the Framework for the Preparation and Presentation of Financial Statements.

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Standards of GRAP should also be read in conjunction with any directives issued by the Board prescribing transitional provisions, as well as any regulations issued by the Minister of Finance regarding the effective dates of the Standards of GRAP, published in the Government Gazette.

Reference may be made here to a Standard of GRAP that has not been issued at the time of issue of this Standard. This is done to avoid having to change the Standards already issued when a later Standard is subsequently issued. Paragraph .12 of the Standard of GRAP on Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

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Objective

.01 The objective of this Standard is to prescribe the procedures that an entity applies to determine whether a non-cash-generating asset is impaired and to ensure that impairment losses are recognised. The Standard also specifies when an entity would reverse an impairment loss and prescribes disclosures.

Scope

.02 An entity that prepares and presents financial statements under the accrual basis of accounting shall apply this Standard in accounting for impairment of non-cash-generating assets, except:

(a) inventories (see the Standard of GRAP on Inventories);

(b) assets arising from construction contracts (see the Standard of GRAP on Construction Contracts);

(c) financial assets that are within the scope of the Standard of GRAP on Financial Instruments;

(d) investment property that is measured at fair value (see the Standard of GRAP on Investment Property);

(e) biological assets related to agricultural activity that are measured at fair value less costs to sell (see the Standard of GRAP on Agriculture);

(f) non-current assets (or disposal groups) classified as held for sale that are measured at the lower of carrying amount and fair value less costs to sell in accordance with the Standard of GRAP on Non-current Assets Held for Sale and Discontinued Operations; and

(g) other non-cash-generating assets in respect of which accounting requirements for impairment are included in another Standard of GRAP.

.03 Entities that hold cash-generating assets as defined in paragraph .09 shall apply the Standard of GRAP on Impairment of Cash-generating Assets to such assets. Entities that hold non-cash-generating assets shall apply the requirements of this Standard to non-cash-generating assets.

.04 This Standard does not apply to inventories and non-cash-generating assets arising from construction contracts because existing Standards of GRAP applicable to these assets contain requirements for recognising and measuring such assets (see the Standards of GRAP on Inventories and Construction Contracts). In addition, this Standard does not apply to biological assets related to agricultural activity that are measured at fair value less costs to sell and non-current assets (or disposal groups) classified as held for sale that are measured at the lower of carrying amount and fair value less costs to sell. The relevant Standards of GRAP dealing with such assets contain measurement requirements.

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.05 This Standard does not apply to financial assets that are included in the scope of the Standard of GRAP on Financial Instruments. Impairment of these assets is dealt with in that Standard.

.06 This Standard does not require the application of an impairment test to an investment property that is carried at fair value in accordance with the Standard of GRAP on Investment Property. Under the fair value model in the Standard of GRAP on Investment Property, an investment property is carried at fair value at each reporting date, and any impairment will be taken into account in the valuation.

.07 Investments in:

(a) controlled entities, as defined in the Standard of GRAP on Consolidated and Separate Financial Statements;

(b) associates, as defined in the Standard of GRAP on Investments in Associates; and

(c) joint ventures, as defined in the Standard of GRAP on Interests in Joint Ventures;

are financial assets that are excluded from the scope of the Standard of GRAP on Financial Instruments. Where such investments are in the nature of non-cash-generating assets, they are dealt with under this Standard. Where these assets are cash-generating assets, they are dealt with under the Standard of GRAP on Impairment of Cash-generating Assets.

.08 This Standard applies to non-cash-generating property, plant and equipment, intangible assets and heritage assets carried at revalued amounts in accordance with the Standards of GRAP on Property, Plant and Equipment, Intangible Assets and Heritage Assets. The fair value for these assets is not determined at each reporting date but depends on the frequency of changes in the fair value from one reporting period to the next. The entity therefore needs to assess at each reporting date whether there is an indication that the value of the asset may be impaired since the last revaluation.

Definitions

.09 The following terms are used in this Standard with the meanings specified:

An active market is a market in which all the following conditions exist:

(a) the items traded within the market are homogeneous;

(b) willing buyers and sellers can normally be found at any time; and

(c) prices are available to the public.

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

Cash-generating assets are assets held with the primary objective of generating a commercial return.

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A cash-generating unit is the smallest identifiable group of assets held with the primary objective of generating a commercial return that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets.

Costs of disposal are incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense.

Depreciation (Amortisation) is the systematic allocation of the depreciable amount of an asset over its useful life.

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.

An impairment is 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.

An impairment loss of a non-cash-generating asset is the amount by which the carrying amount of an asset exceeds its recoverable service amount.

Management comprises those persons responsible for planning, directing and controlling the activities of the entity, including those charged with the governance of the entity in accordance with legislation, in instances where they are required to perform such functions.

Non-cash-generating assets are assets other than cash-generating assets.

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

Useful life is either:

(a) the period of time over which an asset is expected to be used by the entity; or

(b) the number of production or similar units expected to be obtained from the asset by the entity.

Value in use of a non-cash-generating asset is the present value of the asset’s remaining service potential.

Terms defined in other Standards of GRAP are used in this Standard with the same meaning as in those other Standards.

Cash-generating assets and non-cash-generating assets

.10 Cash-generating assets are assets held with the primary objective of generating a commercial return. An asset generates a commercial return when it is deployed in a manner consistent with that adopted by a profit-oriented entity. Holding an asset to generate a “commercial return” indicates that an entity intends to generate positive cash inflows from the asset (or from the cash-generating unit of which the asset is a part) and earn a commercial return that reflects the risk involved in holding the asset. An asset may be held with the primary objective of

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generating a commercial return even though it does not meet that objective during a particular reporting period. Conversely, an asset may be a non-cash-generating asset even though it may be breaking even or generating a commercial return during a particular reporting period. Unless stated otherwise, references to “an asset” or “assets” in the following paragraphs of this Standard are references to “non-cash-generating asset(s)”.

.11 There are a number of circumstances in which entities may hold some assets with the primary objective of generating a commercial return, although the majority of assets are not held for that purpose. For example, a hospital may deploy a building for fee-paying patients. Cash-generating assets of an entity may operate independently of the non-cash-generating assets of the entity.

.12 In certain instances, an asset may generate cash flows although it is primarily held for service delivery purposes. For example, a waste disposal plant is operated to ensure the safe disposal of medical waste generated by state controlled hospitals, but the plant also treats a small amount of medical waste generated by other private hospitals on a commercial basis. The treatment of medical waste from the private hospitals is incidental to the activities of the plant, and the assets that generate cash flows cannot be distinguished from the non-cash-generating assets.

.13 In other instances an asset may generate cash flows and also be used for non-cash-generating purposes. For example, a public hospital has ten wards, nine of which are used for fee paying patients on a commercial basis, and the other is used for non-fee paying patients. Patients from both wards jointly use other hospital facilities (for example, operating facilities). The extent to which the asset is held with the objective of providing a commercial return needs to be considered to determine whether the entity should apply the provisions of this Standard or the Standard of GRAP on Impairment of Cash-generating Assets. If, as in this example, the non-cash-generating component is an insignificant component of the arrangement as a whole, the entity applies the Standard of GRAP on Impairment of Cash-generating Assets rather than this Standard.

.14 In some cases it may not be clear whether the primary objective of holding an asset is to generate a commercial return. In such cases it is necessary to evaluate the significance of the cash flows. It may be difficult to determine whether the extent to which the asset generates cash inflows is so significant that this Standard is applicable rather than the Standard of GRAP on Impairment of Cash-generating Assets. Judgement is needed to determine which Standard to apply. An entity develops criteria so that it can exercise that judgement consistently in accordance with the definition of cash-generating assets and non-cash-generating assets with the related guidance in paragraphs .10 to .13. Paragraph .72 requires an entity to disclose the criteria used in making this judgement. However, given the overall objectives of most entities, the presumption is that assets are non-cash-generating and, therefore, this Standard will apply.

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Depreciation

.15 Depreciation and amortisation are the systematic allocation of the depreciable amount of an asset over its useful life. In the case of an intangible asset, the term “amortisation” generally is used instead of “depreciation”. Both terms have the same meaning.

Impairment

.16 This Standard defines an “impairment” as 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 (amortisation). Impairment, therefore, reflects a decline in the utility of an asset to the entity that controls it. For example, an entity may have a purpose-built military storage facility that it no longer uses. In addition, because of the specialised nature of the facility and its location, it is unlikely that it can be leased out or sold, and therefore the entity is unable to generate cash flows from leasing or disposing of the asset. The asset is regarded as impaired as it is no longer capable of providing the entity with service potential – it has little, or no, utility for the entity in contributing to the achievement of its objectives.

Identifying an asset that may be impaired

.17 A non-cash-generating asset is impaired when the carrying amount of the asset exceeds its recoverable service amount. Paragraph .21 identifies key indications that an impairment loss may have occurred. If any of those indications are present, an entity is required to make a formal estimate of recoverable service amount. If no indication of a potential impairment loss is present, this Standard does not require an entity to make a formal estimate of recoverable service amount.

.18 An entity shall assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable service amount of the asset.

.19 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. This impairment test may be performed at any time during the reporting period, provided it is performed at the same time every year. Different intangible assets may be tested for impairment at different times. However, if such an intangible asset was initially recognised during the current reporting period, that intangible asset shall be tested for impairment before the end of the current reporting period.

.20 The ability of an intangible asset to generate sufficient future economic benefits or service potential to recover its carrying amount is usually subject to greater uncertainty before the asset is available for use than after it is available for use. Therefore, this Standard requires an entity to test for impairment, at least

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annually, the carrying amount of an intangible asset that is not yet available for use.

.21 In assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications:

External sources of information

(a) Cessation, or near cessation, of the demand or need for services provided by the asset.

(b) Significant long-term changes with an adverse effect on the entity have taken place during the period or will take place in the near future, in the technological, legal or government policy environment in which the entity operates.

Internal sources of information

(c) Evidence is available of physical damage of an asset.

(d) Significant long-term changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, or plans to dispose of an asset before the previously expected date.

(e) A decision to halt the construction of the asset before it is complete or in a usable condition.

(f) Evidence is available from internal reporting that indicates that the service performance of an asset is, or will be, significantly worse than expected.

.22 The demand or need for services may fluctuate over time, which will affect the extent to which non-cash-generating assets are used in providing those services, but negative fluctuations in demand are not necessarily indications of impairment. Where demand for services ceases, or nearly ceases, the assets used to provide those services may be impaired. Demand may be considered to have “nearly” ceased when it is so low that the entity would not have attempted to respond to that demand, or would have responded by not acquiring the asset being considered for impairment testing.

.23 The list in paragraph .21 is not exhaustive. There may be other indications that an asset may be impaired. The existence of other indications may result in the entity estimating the asset’s recoverable service amount. For example, any of the following may be an indication of impairment:

(a) during the period, an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use; or

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(b) a significant long-term decline (but not necessarily a cessation or near cessation) in the demand for or need for services provided by the asset.

.24 The events or circumstances that may indicate an impairment of an asset will be significant and will often have prompted discussion by the management. A change in a parameter such as demand for the service, extent or manner of use, legal environment or government policy environment would indicate impairment only if such a change was significant and had or was anticipated to have a long-term adverse effect. A change in the technological environment may indicate that an asset is obsolete, and requires testing for impairment. A change in the use of an asset during the period may also be an indication of impairment. This may occur when, for example, a building used as a school undergoes a change in use and is used for storage. In assessing whether an impairment has occurred, the entity needs to assess changes in service potential over the long term. This underlines the fact that the changes are seen within the context of the anticipated long-term use of the asset. However, the expectations of long-term use can change and the entity’s assessments at each reporting date would reflect that. Appendix B sets out examples of impairment indications referred to in paragraph .21.

.25 In assessing whether a halt in construction would trigger an impairment test, the entity would consider whether construction has simply been delayed or postponed, whether there is an intention to resume construction in the near future or whether the construction work will not be completed in the foreseeable future. Where construction is delayed or postponed to a specific future date, the project may be treated as work in progress and is not considered as halted.

.26 Evidence from internal reporting that indicates that an asset may be impaired, as referred to in paragraph .21(f) above, relates to the ability of the asset to provide goods or services rather than to a decline in the demand for the goods or services provided by the asset. This includes the existence of:

(a) significantly higher costs of operating or maintaining the asset, compared with those originally budgeted; and

(b) significantly lower service or output levels provided by the asset compared with those originally expected due to poor operating performance.

A significant increase in operating costs of an asset may indicate that the asset is not as efficient or productive as initially anticipated in output standards set by the manufacturer, in accordance with which the operating budget was drawn up. Similarly, a significant increase in maintenance costs may indicate that higher costs need to be incurred to maintain the asset’s performance at a level indicated by its most recently assessed standard of performance. In other cases, direct quantitative evidence of an impairment may be indicated by a significant long-term fall in the expected service or output levels provided by the asset.

.27 The concept of materiality applies in identifying whether the recoverable service amount of an asset needs to be estimated. For example, if previous assessments show that an asset’s recoverable service amount is significantly greater than its carrying amount, the entity need not re-estimate the asset’s recoverable service

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amount if no events have occurred that would eliminate that difference. Similarly, previous analysis may show that an asset’s recoverable service amount is not sensitive to one (or more) of the indications listed in paragraph .21.

.28 If there is an indication that an asset may be impaired, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value for the asset needs to be reviewed and adjusted in accordance with the Standard of GRAP applicable to the asset, even if no impairment loss is recognised for the asset.

Measuring recoverable service amount

.29 This Standard defines recoverable service amount as the higher of an asset’s fair value less costs to sell and its value in use. Paragraphs .30 to .46 set out the basis for measuring recoverable service amount.

.30 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.

.31 It may be possible to determine fair value less costs to sell, even if an asset is not traded in an active market. Paragraph .37 sets out possible alternative bases for estimating fair value less costs to sell when an active market for the asset does not exist. However, sometimes it will not be possible to determine fair value less costs to sell because there is no basis for making a reliable estimate of the amount obtainable from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. In this case, the entity may use the asset’s value in use as its recoverable service amount.

.32 If there is no reason to believe that an asset’s value in use materially exceeds its fair value less costs to sell, the asset’s fair value less costs to sell may be used as its recoverable service amount. This will often be the case for an asset that is held for disposal. This is because the value in use of an asset held for disposal will consist mainly of the net disposal proceeds. However, for many entities non-cash-generating assets which are held on an ongoing basis to provide specialised services or public goods to the community, the value in use of the asset is likely to be greater than its fair value less costs to sell.

.33 In some cases, estimates, averages and computational short cuts may provide reasonable approximations of the detailed computations illustrated in this Standard for determining fair value less costs to sell or value in use.

Measuring the recoverable service amount of an intangible asset with an indefinite useful life

.34 Paragraph .19 requires an intangible asset with an indefinite useful life to be tested for impairment annually by comparing its carrying amount with its recoverable service amount, irrespective of whether there is any indication that it may be impaired. However, the most recent detailed calculation of such an asset's recoverable service amount made in a preceding period may be used in

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the impairment test for that asset in the current period, provided all of the following criteria are met:

(a) the most recent recoverable service amount calculation resulted in an amount that exceeded the asset's carrying amount by a substantial margin; and

(b) based on an analysis of events that have occurred and circumstances that have changed since the most recent recoverable service amount calculation, the likelihood that a current recoverable service amount determination would be less than the asset's carrying amount is remote.

Fair value less costs to sell

.35 The best evidence of an asset’s fair value less costs to sell is a 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.

.36 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. The appropriate market price is usually the current bid price. When current bid prices are unavailable, the price of the most recent transaction may provide a basis from which to estimate fair value less costs to sell, provided that there has not been a significant change in economic circumstances between the transaction date and the date as at which the estimate is made.

.37 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 to reflect the amount that an entity could obtain, at reporting date, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal. In determining this amount, an entity could consider the outcome of recent transactions for similar assets within the same industry. Fair value less costs to sell does not reflect a forced sale, unless management is compelled to sell immediately.

.38 Costs of disposal, other than those that have been recognised as liabilities, are deducted in determining fair value less costs to sell. Examples of such costs are legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale. However, termination benefits (as defined in the Standard of GRAP on Employee Benefits) and costs associated with reducing or reorganising an operation following the disposal of an asset are not direct incremental costs to dispose of the asset.

.39 Sometimes, the disposal of an asset would require the buyer to assume a liability and only a single fair value less costs to sell is available for both the asset and the liability.

Value in use

.40 This Standard defines the value in use of a non-cash-generating asset as the present value of the asset’s remaining service potential. “Value in use” in this

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Standard refers to “value in use of a non-cash-generating asset” unless otherwise specified. The present value of the remaining service potential of the asset is determined using any one of the approaches identified in paragraphs .41 to .45, as appropriate.

Depreciated replacement cost approach

.41 Under this 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. An asset may be replaced either through reproduction (replication) of the existing asset or through replacement of its gross service potential. The depreciated replacement cost is measured as the reproduction or replacement cost of the asset, whichever is lower, less accumulated depreciation calculated on the basis of such cost, to reflect the already consumed or expired service potential of the asset.

.42 The replacement cost and reproduction cost of an asset are determined on an “optimised” basis. The rationale is that the entity would not replace or reproduce the asset with a like asset if the asset to be replaced or reproduced is an overdesigned or overcapacity asset. Overdesigned assets contain features which are unnecessary for the goods or services the asset provides. Overcapacity assets are assets that have a greater capacity than is necessary to meet the demand for goods or services the asset provides. The determination of the replacement cost or reproduction cost of an asset on an optimised basis thus reflects the service potential required of the asset.

.43 In certain cases, standby or surplus capacity is held for safety or other reasons. This arises from the need to ensure that adequate service capacity is available in the particular circumstances of the entity. For example, the fire department needs to have fire engines on standby to deliver services in emergencies. Such surplus or standby capacity is part of the required service potential of the asset.

Restoration cost approach

.44 Restoration cost is the cost of restoring the service potential of an asset to its pre-impaired level. Under this approach, 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. The latter cost is usually determined as the depreciated reproduction or replacement cost of the asset, whichever is lower. Paragraphs .41 to .43 include additional guidance on determining the replacement cost or reproduction cost of an asset.

Service units approach

.45 Under this 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 with the reduced number of service units expected from the asset in its impaired state. As in the restoration

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cost approach, the current cost of replacing the remaining service potential of the asset before impairment is usually determined as the depreciated reproduction or replacement cost of the asset before impairment, whichever is lower.

Application of approaches

.46 The choice of the most appropriate approach to measuring value in use depends on the availability of data and the nature of the impairment:

(a) impairments identified from significant long-term changes in the technological, legal or government policy environment are generally measurable using a depreciated replacement cost approach or a service units approach, when appropriate;

(b) impairments identified from a significant long-term change in the extent or manner of use, including that identified from the cessation or near cessation of demand, are generally measurable using a depreciated replacement cost or a service units approach when appropriate; and

(c) impairments identified from physical damage are generally measurable using a restoration cost approach or a depreciated replacement cost approach when appropriate.

Recognising and measuring an impairment loss

.47 Paragraphs .48 to .54 set out the requirements for recognising and measuring impairment losses for an asset. In this Standard “impairment loss” refers to “impairment loss of a non-cash-generating asset” unless otherwise specified.

.48 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.

.49 As noted in paragraph .18, this Standard requires an entity to make a formal estimate of recoverable service amount only if an indication of a potential impairment loss is present. Paragraphs .21 to .28 identify key indications that an impairment loss may have occurred.

.50 An impairment loss shall be recognised immediately in surplus or deficit, unless the asset is carried at a revalued amount in accordance with another Standard of GRAP (for example, in accordance with the revaluation model in the Standard of GRAP on Property, Plant and Equipment). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that Standard of GRAP.

.51 An impairment loss on a non-revalued asset is recognised in surplus or deficit. However, an impairment loss on a revalued asset is recognised directly against any revaluation surplus for the asset to the extent that the impairment loss does not exceed the amount in the revaluation surplus for that same asset.

.52 When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an entity shall recognise a liability if, and only if, that is required by another Standard of GRAP.

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.53 Where the estimated impairment loss is greater than the carrying amount of the asset, the carrying amount of the asset is reduced to zero with a corresponding amount recognised in surplus or deficit. A liability would be recognised only if another Standard of GRAP so requires. An example is when a purpose-built military installation is no longer used and the entity is required by law to remove such installations if not usable. The entity may need to make a provision for dismantling costs if required by the Standard of GRAP on Provisions, Contingent Liabilities and Contingent Assets.

.54 After the recognition of an impairment loss, 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.

Reversing an impairment loss

.55 Paragraphs .56 to .69 set out the requirements for reversing an impairment loss recognised for an asset in prior periods.

.56 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.

.57 In assessing whether there is any indication that an impairment loss recognised in prior periods for an asset may no longer exist or may have decreased, an entity shall consider, as a minimum, the following indications:


(a) Resurgence of the demand or need for services provided by the asset.

(b) Significant long-term changes with a favourable effect on the entity have taken place during the period, or will take place in the near future, in the technological, legal or government policy environment in which the entity operates.


(c) Significant long-term changes with a favourable effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, the asset is used or is expected to be used. These changes include costs incurred during the period to improve or enhance an asset’s performance or restructure the operation to which the asset belongs.

(d) A decision to resume construction of the asset that was previously halted before it was completed or in a usable condition.

(e) Evidence is available from internal reporting that indicates that the service performance of the asset is, or will be, significantly better than expected.

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.58 Indications of a potential decrease in an impairment loss in paragraph .57 mainly mirror the indications of a potential impairment loss in paragraph .21.

.59 The list in paragraph .57 is not exhaustive. An entity may identify other indications of a reversal of an impairment loss that would also require the entity to re-estimate the asset’s recoverable service amount. For example, any of the following may be an indication that the impairment loss may have reversed:

(a) a significant rise in an asset’s market value; or

(b) a significant long-term increase in the demand or need for the services provided by the asset.

.60 A commitment to discontinue or restructure an operation in the near future is an indication of a reversal of an impairment loss of an asset belonging to the operation where such a commitment constitutes a significant long-term change, with a favourable effect on the entity, in the extent or manner of use of that asset. Circumstances where such a commitment would be an indication of reversal of impairment often relate to cases where the expected discontinuance or restructuring of the operation would create opportunities to enhance the utilisation of the asset. An example is an x-ray machine that has been underutilised by a clinic managed by a public hospital and, as a result of restructuring, is expected to be transferred to the main radiology department of the hospital where it will have significantly better utilisation. In such a case, the commitment to discontinue or restructure the clinic’s operation may be an indication that an impairment loss recognised for the asset in prior periods may have to be reversed.

.61 If there is an indication that an impairment loss recognised for an asset may no longer exist or may have decreased, this may indicate that the remaining useful life, the depreciation (amortisation) method or the residual value may need to be reviewed and adjusted in accordance with the Standard of GRAP applicable to the asset, even if no impairment loss is reversed for the asset.

.62 An impairment loss recognised in prior periods for an asset 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, except as described in paragraph .65, be increased to its recoverable service amount. That increase is a reversal of an impairment loss.

.63 This Standard requires an entity to make a formal estimate of recoverable service amount only if an indication of a reversal of an impairment loss is present. Paragraph .57 identifies key indications that an impairment loss recognised for an asset in prior periods may no longer exist or may have decreased.

.64 A reversal of an impairment loss reflects an increase in the estimated recoverable service amount of an asset, either from use or from sale, since the date when an entity last recognised an impairment loss for that asset. Paragraph

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.77 requires an entity to identify the change in estimates that causes the increase in recoverable service amount. Examples of changes in estimates include:

(a) a change in the basis for recoverable service amount (i.e. whether recoverable service amount is based on fair value less costs to sell or value in use);

(b) if recoverable service amount was based on value in use, a change in estimate of the components of value in use; or

(c) if recoverable service amount was based on fair value less costs to sell, a change in estimate of the components of fair value less costs to sell.

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

.66 Any increase in the carrying amount of an asset above 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 is a revaluation. In accounting for such a revaluation, an entity applies the Standard of GRAP applicable to the asset.

.67 A reversal of an impairment loss for an asset shall be recognised immediately in surplus or deficit unless the asset is carried at revalued amount in accordance with another Standard of GRAP (for example, the revaluation model in the Standard of GRAP on Property, Plant and Equipment). Any reversal of an impairment loss of a revalued asset shall be treated as a revaluation increase in accordance with that other Standard of GRAP.

.68 A reversal of an impairment loss on a revalued asset is recognised to the revaluation reserve in the statement of changes in net assets for that asset. However, to the extent that an impairment loss on the same revalued asset was previously recognised in surplus or deficit, a reversal of that impairment loss is recognised in surplus or deficit.

.69 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.

Redesignation of assets

.70 The redesignation of assets from a 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 redesignation is appropriate. A redesignation, by itself, does not necessarily trigger an impairment test or a reversal of an impairment loss. Instead, the indication for an impairment test or a reversal of an impairment loss arises from, as a minimum, the listed indications in paragraph .21.

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.71 There are circumstances in which entities may decide that it is appropriate to redesignate a non-cash-generating asset as a cash-generating asset. For example, an effluent treatment plant was constructed primarily to treat industrial effluent from a social housing unit, for which no charge is made. The social housing unit has been demolished and the site will be redeveloped for industrial and retail purposes. It is intended that, in future, the plant will be used to treat industrial effluent at commercial rates. In light of this decision, the entity decides to redesignate the effluent treatment plant as a cash-generating asset.

Disclosure

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

.73 An entity shall disclose the following for each class of assets:

(a) The amount of impairment losses recognised in surplus or deficit during the period and the line item(s) of the statement of financial performance in which those impairment losses are included.

(b) The amount of reversals of impairment losses recognised in surplus or deficit during the period and the line item(s) of the statement of financial performance in which those impairment losses are reversed.

(c) The amount of impairment losses on revalued assets recognised directly in net assets during the period.

(d) The amount of reversals of impairment losses on revalued assets recognised directly in net assets during the period.

.74 A class of assets is a grouping of assets of similar nature and use in an entity’s operations that is shown as a single item for the purpose of disclosure in the financial statements.

.75 The information required in paragraph .73 may be presented with other information disclosed for the class of assets. For example, this information may be included in a reconciliation of the carrying amount of property, plant and equipment, at the beginning and end of the period, as required by the Standard of GRAP on Property, Plant and Equipment.

.76 An entity that reports segment information in accordance with the Standard of GRAP on Segment Reporting shall disclose the following for each segment reported by the entity:

(a) the amount of impairment losses recognised in surplus or deficit and directly in net assets during the period; and

(b) the amount of reversals of impairment losses recognised in surplus or deficit and directly in net assets during the period.

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

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(a) the events and circumstances that led to the recognition or reversal of the impairment loss;

(b) the amount of the impairment loss recognised or reversed;

(c) the nature of the asset;

(d) if the entity reports segment information in accordance with the Standard of GRAP on Segment Reporting, the reported segment to which the asset belongs, based on the entity’s reporting format;

(e) whether the recoverable service amount of the asset is its fair value less costs to sell or its value in use;

(f) if the recoverable service amount is fair value less costs to sell, the basis used to determine fair value less costs to sell (such as whether fair value was determined by reference to an active market); and

(g) if the recoverable service amount is value in use, the discount rate(s) used in the current estimate and previous estimate (if any) of value in use.

.78 An entity shall disclose the following information for the aggregate of impairment losses and aggregate reversals of impairment losses recognised during the period for which no information is disclosed in accordance with paragraph .77:

(a) the main classes of assets affected by impairment losses (and the main classes of assets affected by reversals of impairment losses); and

(b) the main events and circumstances that led to the recognition of these impairment losses and reversals of impairment losses.

.79 An entity shall disclose in the notes information about the key assumptions used to determine the recoverable service amount of assets during the period that have a significant risk of causing a material adjustment to the carrying amounts of assets.

Transitional provisions

.80 The transitional provisions to be applied by entities on the initial adoption of this Standard are prescribed in a directive(s). The provisions of this Standard should be read in conjunction with each applicable directive.

Effective date

.81 An entity shall apply this Standard of GRAP for annual financial statements covering periods beginning on or after a date to be determined by the Minister of Finance in a regulation to be published in accordance with section 91(1)(b) of the Public Finance Management Act, Act No. 1 of 1999, as amended.

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Appendix A

Flowchart to determine an impairment loss for non-cash-generating assets

The appendix is illustrative only and does not form part of the Standard. The purpose of the appendix is to illustrate the application of the Standard and to assist in clarifying its meaning.

The flow chart applies to non-cash-generating assets once an assessment has been made to determine whether the asset is a non-cash-generating asset after applying the principles in paragraphs .10 to .14.

The objective of the flow chart on the next page is to identify the steps to be taken by an entity:

• to assess whether a non-cash-generating asset is impaired (Appendix A1); and

• to determine the recoverable service amount when one of the indications of impairment have been triggered (Appendix A2).

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Appendix A1

Assess whether a non-cash-generating asset is impaired

Adjust carrying amount of the asset to higher of:

• fair value less costs to sell and

• value in use

(if asset has no service potential – then write down to zero)

No

No

No further impairment testing

necessary (par .17 & .30)

Have any indications of impairment been triggered?

(par .21)

Is the asset’s carrying amount higher than its recoverable

service amount?

Yes

Is the asset tangible or intangible?

Intangible Tangible

Test annually for impairment

Yes

Does it have an indefinite life?

Determine asset’s recoverable service amount i.e. higher of

fair value less costs to sell and value in use (par .29)

(see Appendix A2)

Yes

No

Is it available for use? No Yes

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Appendix A2

Determine the recoverable service amount when one of the indications of impairment have been triggered

Determine FV less costs to

sell (par .35 – .39)

Determine value in use

(par .40 – .46)

If asset’s value in use is not expected to materially exceed fair value (FV) less costs to sell - asset’s FV less

costs will be the recoverable service amount (par .32)

Is market based evidence available in active market to determine FV less

costs to sell?

FV less costs to sell is market price

(current bid price less cost of disposal)

(par .36 & .38)

Apply alternative methods to determine FV less costs to sell:

• most recent transaction price

• best information available in arms length transaction at reporting date (par .36, .37 & .38)

Apply one of the following approaches (paragraph .46):

• Depreciated replacement cost approach (par .41 - .43)

• Restoration cost approach (par.44)

• Service units approach (par.45)

No Yes

Best evidence of asset’s FV less costs to

sell (par .35 & .38)

Is the price of a binding sale agreement

available?

Yes No

Determine asset’s recoverable service amount

Higher of fair value less costs to sell and value in

use

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Appendix B

Indications of impairment — examples

This appendix sets out examples of impairment indications discussed in the Standard to assist in clarifying its meaning. It does not form part of the Standard.


(a) Cessation, or near cessation, of the demand or need for services provided by the asset.

The asset still maintains the same service potential, but demand for that service has ceased or nearly ceased. Examples of assets impaired in this manner include:

(i) a school closed because of a lack of demand for school services arising from a population shift to other areas. It is not anticipated that this demographic trend affecting the demand for the school services will reverse in the foreseeable future;

(ii) a school designed for 1 500 students currently has an enrolment of 150 students – the school cannot be closed because the nearest alternative school is 100 kilometres away. The entity does not envisage the enrolment increasing. At the time of establishment enrolment was 1 400 students – the entity would have acquired a much smaller facility had future enrolment been envisaged to be 150 students. The entity determines that demand has nearly ceased and the recoverable service amount of the school should be compared with its carrying amount;

(iii) a railway line closed due to lack of patronage (for example, the population in a rural area has substantially moved to the city due to successive years of drought, and those that have remained use the cheaper bus service); and

(iv) a stadium whose principal occupant does not renew its occupancy agreement with the result that the facility is expected to close.

(b) Significant long-term changes with an adverse effect on the entity in the technological, legal or government policy environment in which the entity operates.

Technological environment

The service utility of an asset may be reduced if technology has advanced to produce alternatives that provide better or more efficient service. Examples of assets impaired in this manner are:

(i) medical diagnostic equipment that is rarely or never used because a newer machine embodying more advanced technology provides more accurate results (would also meet indication (a) above);

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(ii) software that is no longer being supported by the external supplier because of technological advances and the entity does not have the personnel to maintain the software; and

(iii) computer hardware that has become obsolete as the result of technological development.

Legal or government policy environment

An asset’s service potential may be reduced as a result of a change in a law or regulation. Examples of impairments identified by this indication include:

(iv) an automobile that does not meet new emission standards or an aeroplane that does not meet new noise standards;

(v) a school that can no longer be used for instruction purposes due to new safety regulations regarding its building materials or emergency exits; and

(vi) a drinking water plant that cannot be used because it does not meet new environmental standards.


(c) Evidence is available of physical damage of an asset.

Physical damage would likely result in the asset being unable to provide the level of service that it once was able to provide. Examples of assets impaired in this way include:

(i) a building damaged by fire or flood or other factors;

(ii) a building that is closed due to identification of structural deficiencies;

(iii) sections of an elevated roadway that have sagged, indicating that these sections of roadway will need to be replaced in 15 years rather than the original design life of 30 years;

(iv) a water treatment plant whose capacity has been reduced by an intake blockage and the removal of the blockage is not economical;

(v) a bridge that is weight-restricted due to identification of structural deficiencies;

(vi) a navy destroyer damaged in a collision; and

(vii) equipment that is damaged and can no longer be repaired or for which repairs are not economically feasible.

(d) Significant long-term changes, with an adverse effect on the entity, in the extent to which an asset is used, or is expected to be used.

The asset still maintains the same service potential, but long-term changes have an adverse effect on the extent to which the asset is used. Examples of circumstances in which assets may be impaired in this manner include:

(i) if an asset is not being used to the same degree as it was when originally put into service, or the expected useful life of the asset is shorter than

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originally estimated, the asset may be impaired. An example of an asset that might be identified as potentially being impaired by this indication is a mainframe computer that is underutilised because many applications have been converted or developed to operate on servers or PC platforms. A significant long-term decline in the demand for an asset’s services may translate itself into a significant long-term change in the extent to which the asset is used.

(ii) if the asset is not being used in the same way as it was when originally put into service, the asset may be impaired. An example of an impaired asset that might be identified by this indication is a school building that is being used for storage rather than for educational purposes.

(e) A decision to halt the construction of the asset before it is complete or in a usable condition.

An asset that will not be completed cannot provide the service intended. Examples of assets impaired in this manner include those where:

(i) construction was stopped due to identification of an archaeological discovery or environmental condition such as a nesting ground for a threatened or an endangered species; and

(ii) construction was stopped due to a decline in the economy.

The circumstances that led to the stopping of construction will also be considered. If construction is deferred, that is, postponed to a specific future date, the project could still be treated as work in progress and is not considered as halted.

(f) Evidence is available from internal reporting that indicates that the service performance of an asset is, or will be, significantly worse than expected.

Internal reports may indicate that an asset is not performing as expected or its performance is deteriorating over time. For example, the department of health report on operations of a rural clinic may indicate that an x-ray machine used by the clinic is impaired because the cost of maintaining the machine has significantly exceeded that originally budgeted.

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Appendix C

Measurement of impairment loss — examples

This appendix illustrates the application of the provisions of the Standard to assist in clarifying its meaning. It does not form part of the Standard. The facts assumed in these examples are illustrative only and are not intended to modify or limit the requirements of the Standard or to indicate the Board’s endorsement of the situations or methods illustrated. Application of the provisions of this Standard may require assessment of facts and circumstances other than those illustrated here.

Note: In the following examples, it is assumed that the fair value less costs to sell of the asset tested for impairment is less than its value in use or is not determinable, unless otherwise indicated. Therefore, the asset’s recoverable service amount is equal to its value in use. In these examples the straight line method of depreciation is used.

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Example 1: Depreciated replacement cost approach

Significant long-term change with adverse effect on the entity in the technological environment — underutilised mainframe computer

In 20X1, a municipality purchased a new mainframe computer at a cost of R10 million. The municipality estimated that the useful life of the computer would be seven years and that on average 80 percent of central processing unit (CPU) capacity would be used by the various departments. A buffer of excess CPU time of 20 percent was expected and needed to accommodate scheduling jobs to meet peak period deadlines. Within a few months after acquisition, CPU usage reached 80 percent, but declined to 20 percent in 20X5 because many applications of the departments were converted to run on desktop computers or servers. A computer is available on the market at a price of R500 000 that can provide the remaining service potential of the mainframe computer using the remaining applications.

Evaluation of impairment

The indication of impairment is the significant long-term change in the technological environment resulting in conversion of applications from the mainframe to other platforms and therefore decreased usage of the mainframe computer. (Alternatively it can be argued that a significant decline in the extent of use of the mainframe indicates impairment.) Impairment loss is determined using the depreciated replacement cost approach as follows:

R a Acquisition cost, 20X1 10 000 000

Accumulated depreciation, 20X5 (a × 4 ÷ 7 ) 5 714 286

b Carrying amount, 20X5 4 285 714

c Replacement cost 500 000

Accumulated depreciation(c × 4 ÷ 7) 285 714

d Recoverable service amount 214 286

Impairment loss (b – d) 4 071 428

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Near cessation in demand for the services provided by a non-cash-generating asset – underused mainframe software application

In 20X1, a municipality purchased a software licence for an application for its new mainframe computer for R350 000. The municipality estimated that the useful life of the software would be seven years and that it would receive economic benefits and service potential from the software on a straight-line basis over the life of the software. By 20X5, usage of the application had declined to 15 percent of its originally anticipated demand. A licence for a software application to replace the remaining service potential of the impaired software application costs R70 000.


The indication of impairment is technological change, brought about by the loss of mainframe computer capacity.

R a Acquisition cost, 20X1 350 000

Accumulated amortisation, 20X5 (a × 4 ÷ 7 ) 200 000

b Carrying amount, 20X5 150 000


Accumulated amortisation (c × 4 ÷ 7) 40 000


Impairment loss (b – d) 120 000

(Note: The entity should also test the mainframe computer for impairment if one of the indications of impairment has been triggered).

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Significant long-term change with adverse effect on the entity in the manner of use — school used as warehouse

In 20X1, a school district in the Eastern Cape constructed an elementary school at a cost of R10 million. The estimated useful life of the school is fifty years. In 20X7, the school is closed because enrolments in the district declined unexpectedly due to a population shift caused by the insolvency of a major employer in the area. The school is converted to use as a storage warehouse, and school district has no expectation that enrolments will increase in the future such that the building would be reopened for use as a school. The current replacement cost for a warehouse with the same storage capacity as the school is R4.2 million.

Evaluation of Impairment

Impairment is indicated because the purpose for which the building is used has changed significantly from a place for instructing students to a storage facility, and this is not anticipated to change for the foreseeable future. An impairment loss using depreciated replacement cost approach would be determined as follows:

R a Historical cost, 20X1 10 000 000 Accumulated depreciation, 20X7 (a × 6 ÷ 50) 1 200 000


c Replacement cost of a storage facility of similar capacity 4 200 000 Accumulated depreciation (c × 6 ÷ 50) 504 000

d Recoverable service amount 3 696 000

Impairment loss (b – d) 5 104 000

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Significant long-term change with adverse effect on the entity in the extent of use — school partially closed due to decline in enrolment

In 20X1, a school district in the Eastern Cape constructed a school at the cost of R2.5 million. The entity estimated the school would be used for 40 years. In 20X21, the enrolment declined from 1000 to 200 students as the result of population shift caused by the insolvency of a major employer in the area. The management decided to close the top two floors of the three story school building. The school district has no expectation that enrolments will increase in the future such that the upper stories would be reopened. The current replacement cost of the one story school is estimated at R1.3 million.


Impairment is indicated because the extent of use of the school has changed from three floors to one floor as the result of a reduction in the number of students from 1000 to 200 students. The reduction in the extent of use is significant and the enrolment is expected to remain at the reduced level for the foreseeable future. Impairment loss using a depreciated replacement cost approach would be determined as follows:

R

a Acquisition cost, 20X1 2 500 000

Accumulated depreciation, 20X21 (a × 20 ÷ 40) 1 250 000


c Replacement cost 1 300 000

Accumulated depreciation (c × 20 ÷ 40) 650 000


Impairment loss (b – d) 600 000

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Example 5: Restoration cost approach

Physical damage — school bus damaged in road accident

In 20X1, a primary school acquired a bus at the cost of R200 000 to help students from a nearby village to commute free of charge. The school estimated a useful life of 10 years for the bus. In 20X6, the bus sustained damage in a road accident requiring R40 000 to be restored to a usable condition. The restoration will not affect the useful life of the asset. The cost of a new bus to deliver a similar service is R250 000 in 20X6.

Evaluation of Impairment

Impairment is indicated because the bus has sustained physical damage in the road accident. Impairment loss using the restoration cost approach would be determined as follows:

R

a Acquisition cost, 20X1 200 000

Accumulated depreciation, 20X6 (a × 5 ÷ 10) 100 000

b Carrying amount, 20X6 100 000


Accumulated depreciation (c × 5 ÷ 10) 125 000

d Depreciated replacement cost (undamaged state) 125 000

Less: restoration cost 40 000

e Recoverable service amount 85 000

Impairment loss (b – e) 15 000

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Example 6: Restoration cost approach

Physical damage — building damaged by fire

In 20X1, a municipality built an office building at a cost of R50 million. The building was expected to provide service for 40 years. In 20X20, after 19 years of use, fire caused severe structural problems. Due to safety reasons, the office building is closed and structural repairs costing R35.5 million are to be made to restore the office building to an usable condition. The replacement cost of a new office building is R100 million.


Impairment is indicated because the office building has sustained physical damage due to the fire. Impairment loss using a restoration cost approach would be determined as follows:

R




c Replacement cost (of a new building) 100 000 000

d Accumulated depreciation (c × 19 ÷ 40) 47 500 000

Depreciated replacement cost (undamaged) 52 500 000

Less: restoration cost 35 500 000

e Recoverable service amount 17 000 000

Impairment loss (b– e) 9 250 000

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Example 7: Service units approach

Significant long-term change with adverse effect on the entity in the extent of use — high rise building partially unoccupied for the foreseeable future

In 20X1, a municipality constructed a 20 story office building for use by the Council at the cost of R80 million. The building was expected to have a useful life of 40 years. In 20X16, fire safety regulations required that the top 4 stories of high rise buildings should be left unoccupied for the foreseeable future. The building has a fair value less costs to sell of R45 million in 20X16 after regulations came into force. The current replacement cost of a similar 20 story building is R85 million.


Impairment is indicated because the extent of use of the office building has changed from 20 floors to 16 floors as the result of new fire safety regulations. The reduction in the extent of use is significant and the occupation of the building is expected to remain at the reduced level (16 floors) for the foreseeable future. Impairment loss using the service units approach would be determined as follows:

R




c Replacement cost (20 story building) 85 000 000

Accumulated depreciation (c × 15 ÷ 40) 31 875 000

d

Depreciated replacement cost before adjustment for remaining service units 53 125 000

e Value in use of the building after the regulation came into force (d × 16 ÷ 20) 42 500 000

f Fair value less costs to sell of the building after

regulation came into force 45 000 000

g Recoverable service amount (higher of e and f) 45 000 000

Impairment loss (b – g) 5 000 000

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Example 8: Service units approach

Evidence from internal reporting — higher cost of operating the printing machine

In 20X1, a department purchased a new printing machine at a cost of R40 million. The department estimated that the useful life of the machine would be 40 million copies of books to be printed over 10 years for use by primary school students. In 20X6, it was reported that an automated feature of the machine’s function does not operate as expected, resulting in a 25 percent reduction in the machine’s annual output level over the remaining 5 years of the useful life of the asset. The replacement cost of a new printing machine is R45 million in 20x6.


Impairment is indicated by evidence from internal reporting that the service performance of the printing machine is worse than expected. Circumstances suggest that the decline in the service potential of the asset is significant and of a long-term nature. Impairment loss using a service units approach is determined as follows:

R


Accumulated depreciation (a × 5 ÷ 10 ) 20 000 000


c Replacement cost 45 000 000

Accumulated depreciation (c × 5 ÷ 10) 22 500 000

d

Depreciated replacement cost before adjustment for remaining service units 22 500 000

e Recoverable service amount (d × 75%) 16 875 000

Impairment loss (b – e) 3 125 000

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Appendix D

Consequential amendments to other Standards of GRAP

The purpose of the appendix is to identify the consequential amendments to other Standards of GRAP resulting from the issue of the Standards of GRAP on Impairment of Non-cash-generating Assets and Impairment of Cash-generating Assets.

Amended text is shown with new text underlined and deleted text struck through.

Amendments to other Standards of GRAP

The Standard of GRAP on The Effects of Changes in Foreign Exchange Rates

D1. Paragraph .27 is to be amended as follows:

.27 The carrying amount of some items is determined by comparing two or more amounts. For example, the carrying amount of inventories held for sale is the lower of cost and net realisable value in accordance with the Standard of GRAP on Inventories. Similarly, in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets, the carrying amount of an asset for which there is an indication of impairment is the lower of its carrying amount before considering possible impairment losses and its recoverable amount or recoverable service amount. When such an asset is non-monetary and is measured in a foreign currency, the carrying amount is determined by comparing:

(a) the cost or carrying amount, as appropriate, translated at the exchange rate at the date when that amount was determined (i.e. the rate at the date of the transaction for an item measured in terms of historical cost); and

(b) the recoverable amount or recoverable service amount, as appropriate, translated at the exchange rate at the date when that value was determined (e.g. the closing rate at the reporting date).

The effect of this comparison may be that an impairment loss is recognised in the functional currency but would not be recognised in the foreign currency, or vice versa.

The Standard of GRAP on Borrowing Costs

D2. The heading and Paragraph .21 is to be amended as follows:

Excess Assessing of the carrying amount of the qualifying asset over recoverable amount for write-down or write-off

.21 When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its recoverable amount or recoverable service amount, or net realisable value or replacement cost (depending on the nature of the asset), the carrying amount is written down or written off in accordance with the requirements of the Standards of GRAP on Impairment of Cash-generating

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Assets, Impairment of Non-cash-generating Assets and Inventories Impairment of Assets. In certain circumstances, the amount of the write-down or write-off is written back in accordance with those Standards of GRAP.

The Standard of GRAP on Investments in Associates

D3. Paragraphs .40 and .41 are to be amended as follows:

.40 Because goodwill that forms part of included in the carrying amount of an investment in an associate is not separately recognised, it is not tested for impairment separately by applying the requirements for impairment testing goodwill in the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets. Instead the entire carrying amount of the investment is tested under for impairment in accordance with the Standards of GRAP on Impairment of Cash-generating Assets or Impairment of Non-cash-generating Assets Impairment of Assetsas a single amount, by comparing its recoverable amount or recoverable service amount (higher of value in use and fair value less costs to sell) with its carrying amount, whenever application of the requirements in the Standards of GRAP on Financial Instruments: Recognition and Measurement indicates that the investment may be impaired.

.40A In determining the value in use of a cash-generating the investment, an entity estimates:

(a) its share of the present value of the estimated future cash flows expected to be generated by the associate, including the cash flows from the operations of the associate and the proceeds from the ultimate disposal of the investment; or

(b) the present value of the estimated future cash flows expected to arise from dividends to be received from the investment and from its ultimate disposal.

Under appropriate assumptions, both methods give the same result. Any resulting impairment loss for the investment is allocated in accordance with the Standards of GRAP on Impairment of Non-cash-generating Assets and Impairment of Cash-generating Assets Impairment of Assets. Therefore, it is allocated first to any remaining goodwill (see paragraph .30).

.40B In determining the value in use of a non-cash-generating investment, an entity estimates the present value of the remaining service potential of the investment using the approaches specified in the Standard of GRAP on Impairment of Non-cash-generating Assets.

.41 The recoverable amount or recoverable service amount of an investment in an associate is assessed for each associate, unless the associate does not generate cash inflows or service potential from continuing use that are largely independent of those from other assets of the entity.

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D4. The disclosure requirements in paragraph .45 are to be amended as follows:

.45 (f) Gross amount of goodwill at the end of the period (including impairment).

(g) The amount of goodwill or other asset written down due to impairment.

(h) The amount of any reversal of goodwill or other assets previously

written down due to impairment.

The Standard of GRAP on Interests in Joint Ventures


.56 To assess whether a transaction between a venturer and a joint venture provides evidence of impairment of an asset, the venturer determines the recoverable amount or the recoverable service amount of the assets in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets.

.56A In determining value in use of a cash generating asset, the venturer estimates future cash flows from the asset on the basis of continuing use of the asset and its ultimate disposal by the joint venture.

.56B In determining the value in use of a non-cash-generating asset, the venturer estimates the present value of the remaining service potential of the asset using the approaches specified in the Standard of GRAP on Impairment of Non-cash-generating Assets.

The Standard of GRAP on Financial Reporting in Hyperinflationary Economies


.20 To determine whether the restated amount of a non-monetary item has become impaired and should be reduced, an entity applies the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets. Hence, in such cases, restated amounts of property, plant and equipment, goodwill, patents and trademarks are reduced to recoverable amount or recoverable service amount, and restated amounts of inventories are reduced to net realisable value and restated amounts of current investments are reduced to market value.

The Standard of GRAP on Leases

D7. Paragraphs .45, .47, .73, .76 and .83 are to be amended as follows:

.45. To determine whether a leased asset has become impaired, an entity applies the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets.

.47 In addition, the requirements for disclosure in accordance with the Standards of GRAP on Investment Property, Property, Plant and Equipment, Intangible Assets, Agriculture, Impairment of Cash-generating Assets and Impairment of

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Non-cash-generating Assets Impairment of Assets apply are applied to the amounts of leased assets held under finance leases.

.73 To determine whether a leased asset has become impaired, an entity applies the Standard of GRAP on Impairment of Cash-generating Assets Impairment of Assets.

.76 In addition, the disclosure requirements of the Standards of GRAP on Investment Property, Property, Plant and Equipment, Intangible Assets, Agriculture and Impairment of Cash-generating Assets Impairment of Assets apply to lessors for assets provided under operating leases.

.83 For finance leases, no such adjustment is necessary unless there has been an impairment in value and that impairment is required to be recognised in accordance with the requirements of the Standard of GRAP on Impairment of Cash-generating Assets Impairment of Assets.

The Standard of GRAP on Investment Property

D8. Paragraphs .55, .and .82(a) are to be amended as follows:

.55 Fair value differs from value in use, as defined in the Standard of GRAP on Impairment of Cash-generating AssetsImpairment of Assets. Fair value reflects knowledge and estimates of knowledgeable, willing buyers and sellers. In contrast, value in use reflects the entity’s estimates, including the effects of factors that may be specific to the entity and not applicable to entities in general. For example, fair value does not reflect any of the following factors to the extent that they would not be generally available to knowledgeable, willing buyers and sellers…

.82 Impairments or losses of investment property, related claims for or payments of compensation from third parties and any subsequent purchase or construction of replacement assets are separate economic events and are accounted for separately as follows:

(a) impairments of investment property are recognised in accordance with the Standard of GRAP on Impairment of Cash-generating Assets Impairments of Assets,

D9. The disclosure requirement in paragraph .88(d)(v) is to be amended as follows:

.88(d)(v) the amount of impairment losses recognised, and the amount of impairment losses reversed, during the period in accordance with the Standard of GRAP on Impairment of Cash-generating Assets Impairment of Assets,

The Standard of GRAP on Property, Plant and Equipment

D10. The following definitions in paragraph .10 are to be deleted:

Recoverable amount is the higher of s a cash-generating asset’s net selling price and its value in use.


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D11. Paragraphs .16, .73 and .75(a) are to be amended as follows:

.16 Items of property, plant and equipment may be required for safety or environmental reasons. The acquisition of such property, plant and equipment, although not directly increasing the future economic benefits or service potential of any particular existing item of property, plant and equipment, may be necessary for an entity to obtain the future economic benefits or service potential from its other assets. Such items of property, plant and equipment qualify for recognition as assets because they enable an entity to derive future economic benefits or service potential from related assets in excess of what could be derived had those items not been acquired. For example, fire safety regulations may require a hospital to retro-fit new sprinkler systems. These enhancements are recognised as an asset because, without them, the entity is unable to operate the hospital in accordance with the regulations. However, the resulting carrying amount of such an asset and related assets is reviewed for impairment in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets.

.73 To determine whether an item of property, plant and equipment is impaired, an entity applies the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets. These Standards of GRAP explains how an entity reviews the carrying amount of its assets, how it determines the recoverable amount or recoverable service amount of an asset and when it recognises, or reverses the recognition of, an impairment loss.

.75 (a) impairments of items of property, plant and equipment are recognised in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets,

D12. The disclosure requirements in paragraph .82(e) and .87 are to be amended as follow:

.82(e)(iv) increases or decreases resulting from revaluations under paragraphs .39, .49 and .50 and from impairment losses recognised or reversed directly in net assets under the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets,

(v) impairment losses recognised in surplus or deficit in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets,

(vi) impairment losses reversed in surplus or deficit in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets,

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.87 In accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets an entity discloses information on impaired property, plant and equipment in addition to the information required by paragraph .82(e)(iv) - (vi).

The Standard of GRAP on Provisions, Contingent Liabilities and Contingent Assets

D13. Paragraphs .77(c), .85 and .90 are to be amended as follows:

.77(c) if the adjustment results in an addition to the cost of an asset, the entity shall consider whether this is an indication that the new carrying amount of the asset may not be fully recoverable. If it is such an indication, the entity shall test the asset for impairment by estimating its recoverable amount or recoverable service amount, and shall account for any impairment loss, in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets impairment of assets.

.85 An expectation of deficits from future operating activities is an indication that certain assets used in these activities may be impaired. An entity tests these assets for impairment. Guidance on accounting for impairment is found in the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets impairment of assets.

.90 Before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets dedicated to that contract (see the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets).

The Standard of GRAP on Non-current Assets Held for Sale and Discontinued Operations

D14. The following definitions in paragraph .07 are to be amended as follows:

Cash-generating assets are assets held to generate with the primary objective of generating a commercial return.

A cash-generating unit is the smallest identifiable group of assets held with the primary objective of generating a commercial return that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets.

D15. The following definitions in paragraph .07 are to be deleted:

Recoverable amount is the higher of s a cash-generating asset’s net selling price and its value in use.


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Value in use is the present value of the estimated future cash flows expected to be derived arise from the continuing use of an asset and from its disposal at the end of its useful life.


D16. Paragraphs .23, .24 and .25 are to be amended as follows:

.23 An entity shall recognise a gain for any subsequent increase in fair value less costs to sell of an asset, but not in excess of the cumulative impairment loss that has been recognised either in accordance with this Standard or previously in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets.

.24 An entity shall recognise a gain for any subsequent increase in fair value less costs to sell of a disposal group:

(b) not in excess of the cumulative impairment loss that has been recognised, either in accordance with this Standard or previously in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets, on the non-current assets that are within the scope of the measurement requirements of this Standard.

.25 The impairment loss (or any subsequent gain) recognised for a disposal group shall reduce (or increase) the carrying amount of the non-current assets in the group that are within the scope of the measurement requirements of this Standard, in the order of allocation set out in the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets.

D17. Example 9 in Appendix B is to be amended as follows:

Example 9

Allocation of an impairment loss on a disposal group

Paragraph .25 of the Standard requires an impairment loss (or any subsequent gain) recognised for a disposal group to reduce (or increase) the carrying amount of the non-current assets in the group that are within the scope of the measurement requirements of the Standard, in the order of allocation set out in of the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets. Example 9 illustrates the allocation of an impairment loss on a disposal group.

The impairment loss is allocated to non-current assets to which the measurement requirements of the Standard are applicable. Therefore, no impairment loss is allocated to inventory and AFS financial assets. The loss is allocated to the other assets in the order of allocation set out in the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets.

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The Standard of GRAP on Agriculture


.36 In determining cost, accumulated depreciation and accumulated impairment losses, an entity considers the Standards of GRAP on Inventories, Property, Plant and Equipment, Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets.

The Standard of GRAP on Intangible Assets

D19. The following definitions in paragraph .09 to be deleted:

Recoverable amount of an asset or a cash-generating unit is the higher of fair value less costs to sell and its value in use.


Value in use of a cash-generating asset is the present value of the future cash flows expected to be derived from an asset or cash-generating unit.


D20. Paragraphs .57, .86, .111, .113, .114 and 121(e) are to be amended as follows:

.57 To demonstrate how an intangible asset will generate probable future economic benefits or service potential, an entity assesses the future economic benefits or service potential to be received from the asset using the principles in the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets. If the asset will generate economic benefits or service potential only in combination with other assets, the entity applies the concept of cash-generating units in the Standards of GRAP on Impairment of Cash-generating Assets.

.86 The fact that an active market no longer exists for a revalued intangible asset may indicate that the asset may be impaired and that it needs to be tested in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets.

.111 In accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets, an entity is required to test an intangible asset with an indefinite useful life for impairment by comparing its recoverable amount and recoverable service amount with its carrying amount:

(a) annually, and

(b) whenever there is an indication that the intangible asset may be impaired.

.113 In accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets, reassessing the useful life of an intangible asset as

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finite rather than indefinite is an indicator that the asset may be impaired. As a result, the entity tests the asset for impairment by comparing its recoverable amount or recoverable service amount, determined in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets, with its carrying amount, and recognising any excess of the carrying amount over the recoverable amount or recoverable service amount as an impairment loss.

.114 To determine whether an intangible asset is impaired, an entity applies the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets. These Standards explain when and how an entity reviews the carrying amount of its assets, how it determines the recoverable amount or recoverable service amount of an asset and when it recognises or reverses an impairment loss.

.121(e)(v) impairment losses recognised in surplus or deficit during the period (if any) in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets;

(vi) impairment losses reversed in surplus or deficit during the period (if any) in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets;

.121 An entity discloses information on impaired intangible assets in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets in addition to the information required …

D21. The illustrative example to paragraph .68 is to be amended as follows:

Example illustrating paragraph .68

At the end of the financial year, the developed system is recognised as an intangible asset at a cost of R100 (expenditure incurred since the date when the recognition criteria were met, i.e. 1 March 20X6). The R900 expenditure incurred before 1 March 20X6 is recognised as an expense because the recognition criteria were not met until 1 March 20X6. This expenditure does not form part of the cost of the system recognised in the statement of financial position.

During the financial year ending 31 March 20X7, expenditure incurred is R2 ,000. At the end of this financial year, the recoverable service amount of the system (including future cash outflows to complete the system before it is available for use) is estimated to be R1 ,900.

At the end of the 20X7 financial year, the cost of the developed system is R2 ,100 (R100 expenditure recognised at the end of 20X6 plus R2 ,000 expenditure recognised in the 20X6 financial year). The entity recognises an impairment loss of R200 to adjust the carrying amount of the developed system before impairment loss (R2 ,100) to its recoverable service amount (R1 ,900). This impairment loss will be reversed in a subsequent period if the requirements for the reversal of an

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impairment loss in the Standards of GRAP on Impairment of Non-cash-generating Assets are met.

D22. The illustrative examples in Appendix A are to be amended as follows:

Example 1 – an acquired database of property owners

…Because the municipality acquired the database and had not generated the database internally, the database will fall within the recognition criteria of an intangible asset. The database would be amortised over management’s best estimate of its useful life, for example 18 months. Although the municipality may intend to add property owners and other information to the database in the future, the expected benefits of the acquired database relate only to the property owners on that database at the date it was acquired. The database also would be reviewed for impairment in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets by assessing at each reporting date whether there is any indication that the database may be impaired.

Example 2 – an acquired patent that expires in 15 years

…The patent would be amortised over its five-year useful life to the entity, with a residual value equal to the present value of 60 percent of the patent’s fair value at the date it was acquired. The patent would also be reviewed for impairment in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets by assessing at each reporting date whether there is any indication that it may be impaired.

Example 3 – an acquired copyright that has a remaining legal life of 50 years

…The copyright would be amortised over its 30-year estimated useful life. The copyright would also be reviewed for impairment in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets by assessing at each reporting date whether there is any indication that it may be impaired.

Example 4 – an acquired broadcasting licence that expires in five years

…The broadcasting licence would be treated as having an indefinite useful life because it is expected to contribute to the entity’s net cash inflows indefinitely. Therefore, the licence would not be amortised until its useful life is determined to be finite. The licence would be tested for impairment in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets annually and whenever there is an indication that it may be impaired.

Example 5 – the broadcasting licence in example 4

…Because the broadcasting licence can no longer be renewed, its useful life is no longer indefinite. Thus, the acquired licence would be amortised over its remaining three-year useful life and immediately tested for impairment in accordance with the

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Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets.

Example 6 – an acquired airline route authority between two cities granted to a private entity that expires in three years

…Because the facts and circumstances support the acquiring entity’s ability to continue the air service indefinitely, the intangible asset related to the route authority is treated as having an indefinite useful life. Therefore, the route authority would not be amortised until its useful life is determined to be finite. It would be tested for impairment in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets annually and whenever there is an indication that it may be impaired.

Example 7 – an acquired vaccine for malaria control

…The vaccine would be treated as having an indefinite useful life because it is expected to contribute to net cash inflows indefinitely. Therefore, the vaccine would not be amortised until its useful life is determined to be finite. It would be tested for impairment in accordance with the Standards of GRAP on Impairment of Cash-generating Assets and Impairment of Non-cash-generating Assets Impairment of Assets annually and whenever there is an indication that it may be impaired.

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Basis for conclusions

This basis for conclusions gives the Accounting Standards Board’s (the Board’s) reasons for rejecting certain solutions related to the accounting for impairment of non-cash-generating assets. This basis for conclusions accompanies, but is not part of, the Standard of GRAP on Impairment of Non-cash-generating Assets (GRAP 21).

Introduction

BC1. This Standard of GRAP prescribes the procedures that an entity applies to determine whether a non-cash-generating asset is impaired and establishes how the impairment is recognised and measured. This Standard is primarily drawn from the International Public Sector Accounting Standard on Impairment of Non-cash-generating Assets (IPSAS 21). In developing this Standard, the Board also considered pronouncements issued by other standard setting bodies dealing with the accounting for impairment of assets.

BC2. This basis for conclusions summarises the significant departures that are made from IPSAS 21 and the reasons for such departures.

Scope

Inclusion of property, plant and equipment carried at revalued amounts

BC3. Property, plant and equipment carried at revalued amounts in accordance with the revaluation model are within the scope of the International Accounting Standard on Impairment of Assets (IAS 36).

BC4. The scope of IPSAS 21, however, excludes non-cash-generating property, plant and equipment carried at revalued amounts in accordance with the revaluation model in the International Public Sector Accounting Standard on Property, Plant and Equipment (IPSAS 17). The basis for conclusions in IPSAS 21 states that the IPSASB is of the view that assets carried at revalued amounts in accordance with the revaluation model in IPSAS 17 will be revalued with sufficient regularity to ensure that they are carried at an amount that is not materially different from their fair value at the reporting date. Impairment will therefore be taken into account in that valuation.

BC5. A similar scope exclusion for cash-generating property, plant and equipment carried at revalued amounts was included in the International Public Sector Accounting Standard on Impairment of Cash-generating Assets (IPSAS 26). The IPSASB concluded that it would be onerous to impose a requirement to test for impairment in addition to the existing requirement in IPSAS 17 that requires assets to be revalued with sufficient regularity to ensure that they are carried at an amount that is not materially different from their fair value at the reporting date. Therefore, on balance, the IPSASB concluded that IPSAS 26 should be consistent with the conclusion in IPSAS 21.

BC6. In its argument to exclude property, plant and equipment carried at revalued amounts from the scope of IPSAS 21 and IPSAS 26, the IPSASB noted that in IAS 36 the maximum amount of an impairment loss is the disposal costs. This is particularly relevant in cases where the fair value of an item of property, plant

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and equipment is its market value. The IPSASB is of the view that, in most cases, these will not be material and, from a practical point of view, it is not necessary to measure an asset’s recoverable service amount and to recognise an impairment loss for the disposal costs of the asset.

BC7. The Board, however, agrees with the scope inclusion of property, plant and equipment carried at revalued amounts as in IAS 36. The Board is the view that it will not be too onerous to assess at each reporting date whether there is an indication that an asset may be impaired, or that an impairment loss recognised in prior periods for the asset may no longer exist.

BC8. The Board is also of the view that entities may not revalue their assets with “sufficient regularity”, as the cost of revaluing certain public sector assets may initially be quite expensive. The disposal costs of certain specialised assets in the public sector therefore may well be significant. The scope exclusion for non-cash-generating property, plant and equipment carried at revalued amounts is therefore not included in this Standard.

Inclusion of intangible assets carried at revalued amounts

BC9. For similar reasons as those expressed for the scope exclusion of non-cash-generating property, plant and equipment carried at revalued amounts, the IPSASB also scoped out the impairment of cash-generating intangible assets carried at revalued amounts. IAS 36, however, includes the impairment of such intangible assets in the scope of the Standard.

BC10. The Board, for similar reasons as those expressed in the scope inclusion of non-cash-generating property, plant and equipment carried at revalued amounts, agrees with the scope inclusion of impairment of non-cash-generating intangible assets carried at revalued amounts as in IAS 36. The scope exclusion for the impairment of non-cash-generating intangible assets carried at revalued amounts is therefore not included in this Standard.

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Comparison with the International Public Sector Accounting Standard on Impairment of Non-Cash-Generating Assets (February 2007)

The Standard of GRAP on Impairment of Non-cash-generating Assets is drawn primarily from the International Public Sector Accounting Standard on Impairment of Non-Cash-Generating Assets (IPSAS 21). The main differences between this Standard and IPSAS 21 are as follows:

• This Standard uses different terminology, in certain instances, from IPSAS 21. The most significant example is the use of the term “net assets” in this Standard. The equivalent term in IPSAS 21 is “net assets/equity”.

• The term “management” has been introduced in this Standard. IPSAS 21 does not contain an equivalent term.

• The scope of the Standard of GRAP is different in that biological assets related to agricultural activities that are measured at fair value less costs to sell and non-current assets (or disposal groups) classified as held for sale are excluded from the scope of this Standard. IPSAS 21 has no such scope exclusions.

• Non-cash generating property, plant and equipment that is measured at revalued amounts, and intangible assets that are measured at revalued amounts have not been scoped out of this Standard. Additional guidance on the treatment of impairment losses for assets measured at revalued amounts, and additional disclosures relating to such assets, were also included in this Standard. Assets measured at revaluated amounts are scoped out from IPSAS 21. Accordingly, guidance on the treatment of impairment losses related to such assets is also not included in IPSAS 21.

• The guidance in this Standard has been aligned with the guidance in the Standard of GRAP on Impairment of Cash-generating Assets (GRAP 26). Guidance on measuring the recoverable service amount of an intangible asset with an indefinite useful life was included in this Standard. IPSAS 21 does not include such guidance.

• This Standard has incorporated changes to International Accounting Standards (IAS) under the Improvements project of the International Accounting Standards Board (IASB) issued in May 2008.

• Transitional provisions applicable to this Standard are prescribed in directives 2 to 4 issued by the Board, and are not included in the text of the Standard. IPSAS 21 includes transitional provisions applicable to the adoption as part of the Standard.

• A flow chart is included as an appendix to assist entities in assessing whether a non-cash-generating asset is impaired and to determine the recoverable service amount when one of the impairment indicators have been triggered.

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