april 07
tpp
07-1
amended March 2012
Accounting Policy:
Valuation of Physical Non-Current Assets at Fair Value
NOTE: This TPP has been amended by and should be read in
conjunction with NSWTC 12/05 and NSWTC 10/07.
Amended sections in this document are highlighted.
Policy & Guidelines Paper
Amendments to TPP 07-01
NSWTC 12/05 Fair Value of Specialised Physical Assets amends TPP 07-1 and allows the
option in AASB 116 Property, Plant and Equipment to measure assets, either using the
depreciated replacement cost or an income approach, in the absence of market based evidence.
This Circular is only relevant to NSW public sector entities with cash generating specialised
assets (i.e. mainly for-profit entities).
NSWTC 10/07 Land under roads amends TPP 07-1 and requires all NSW public sector entities
to recognise and value all land under roads at fair value. Most land under roads has no feasible
alternative use and must be valued at existing use, based on an en globo valuation approach or
proxy such as open space land.
Valuation of Physical Non-Current Assets at Fair Value
[amended by NSWTC 12/05 and NSWTC 10/07]
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07-1
Contents:
Preface .................................................................................... 1
Executive Summary ................................................................. 2
1. Introduction ........................................................................ 4
1.1
Purpose of Policy .............................................................. 4
1.2
Fair value adopted ............................................................ 4
1.3
Application ....................................................................... 4
2. Overview of Valuation Policy .............................................. 6
2.1
General property, plant and equipment valuation principles ... 6
2.1.1 Step one - Valuation principles in AASB 116 ......................... 6
2.1.2 Step two - Impairment principles in AASB 136 ..................... 8
2.2
Clarification needed to apply the property, plant and
equipment and fair value principles ................................... 10
2.3
Step one - Guidance to apply AASB 116
valuation principles ......................................................... 11
2.3.1 Fair value of assets is to be measured at highest
and best use .................................................................. 11
2.3.2 Fair value is determined by the best available market ............
evidence ........................................................................ 13
2.3.3 Fair value where market prices cannot be observed ............ 14
2.3.4 Guidance on depreciated replacement cost ........................ 14
2.3.5 Why an income approach should not be used to value
specialised assets, where there is no market-based
evidence of fair value ...................................................... 15
2.3.6 Frequency of revaluation ................................................. 17
2.4
Step two - Guidance to apply AASB 136 impairment
principles ....................................................................... 17
2.4.1 Meaning of “fair value less costs to sell” in the recoverable
amount test ................................................................... 18
2.4.2 Recoverable amount for a cash-generating unit .................. 18
2.4.3 Recoverable amount test – Application to not-for-profit ..........
entities .......................................................................... 19
2.5
Clarified decision trees .................................................... 20
New South Wales Treasury
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Valuation of Physical Non-Current Assets at Fair Value
[amended by NSWTC 12/05 and NSWTC 10/07]
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Valuation of land and buildings (including investment
property) ..................................................................... 23
3.1
Valuation of land ............................................................ 23
3.2
Valuation of buildings ...................................................... 24
3.2.1 Non-specialised buildings ................................................. 24
3.2.2 Specialised buildings ....................................................... 25
3.3
Valuation of investment property ...................................... 26
3.3.1 Fair value model adopted................................................. 26
3.3.2
Distinguishing investment property from other property ...... 26
3.3.3 Additional AASB 140 guidance on fair value ....................... 27
3.3.4 Property leased to other entities in the group ..................... 28
3.3.5 Property interests held by a lessee under an operating lease 28
4.
Valuation of specialised plant and infrastructure ......... 29
4.1
Introduction ................................................................... 29
4.2
Valuation of specialised plant and infrastructure ................. 29
4.3
The lowest cost of a modern equivalent asset..................... 30
4.4
Adjustment for overdesign, overcapacity and
redundant assets ............................................................ 31
4.4.1 Overcapacity .................................................................. 31
4.4.2 Redundant components ................................................... 31
4.4.3 Overdesigned assets ....................................................... 31
4.4.4 Spares for plant and equipment........................................ 32
4.4.5 Service and quality standards .......................................... 32
4.5
“Incremental optimisation” .............................................. 32
5.
Impairment testing of cash-generating units .............. 33
5.1
Introduction ................................................................... 33
5.2
Identifying impaired assets .............................................. 35
5.3
Guidance on what constitutes a cash-generating unit .......... 35
5.4
For-profit / not-for-profit entity classification ...................... 36
5.5
Whether an entity can have cash-generating units and
other assets ................................................................... 37
5.5.1 For-profit entity .............................................................. 37
5.5.2 Not-for-profit entity ........................................................ 37
New South Wales Treasury
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Determining the net cash inflows of a cash-generating unit .. 38
5.6.1 Elements of value in use .................................................. 38
5.6.2 Basis of estimates for value in use cash-flows .................... 38
5.7
Discounting future cash flows ........................................... 39
5.8
Other guidance ............................................................... 40
6.
Heritage / cultural assets ............................................ 41
6.1
Introduction ................................................................... 41
6.2
Library/museum collections and works of art ...................... 42
6.3
Heritage properties ......................................................... 43
7.
Other valuation issues ................................................. 45
7.1
Separate restatement of gross amount and accumulated
depreciation ................................................................... 45
7.2
Asset revaluation reserve on disposal ................................ 46
7.3
Asset revaluation reserve – unit of measure ....................... 46
7.4
Restoration / remediation costs ........................................ 47
7.4.1 Remediation costs where there is a legal or constructive
obligation ...................................................................... 48
7.4.2 Remediation costs where there is no legal or constructive
obligation ...................................................................... 49
7.5
Major inspection costs ..................................................... 50
7.6
Conduct of valuations ...................................................... 51
7.7
Disclosures for assets not recognised ................................ 52
7.8
Depreciation .................................................................. 52
7.8.1 Depreciation under AASB 116........................................... 52
7.8.2 Investment property ....................................................... 53
7.9
Non-specialised assets .................................................... 53
7.10
Assets held for sale ......................................................... 53
7.10.1 Measurement and disclosure requirements......................... 53
7.10.2 Exclusions...................................................................... 54
7.11
Valuation of easements ................................................... 54
7.12
Other references............................................................. 54
New South Wales Treasury
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Appendix A – General valuation principles ............................ 55
1.
AASB 116 Property, Plant and Equipment .......................... 55
2.
AASB 140 Investment Property ........................................ 55
Appendix B – Valuation of land .............................................. 59
1.
Practical considerations in land valuation ........................... 59
2.
Valuation methods for specific land assets ......................... 60
3.
Valuation of land under specialised plant, buildings and
infrastructure assets ....................................................... 62
Appendix C – Main differences – TPP 07-1 compared to
TPP05-3 ....................................................................... 67
Appendix D – Main differences compared to previous
Australian requirements on first time adoption of
AEIFRS in 2005/06 ...................................................... 68
1.
AASB 116 Property, Plant and Equipment .......................... 68
2.
AASB 136 Impairment of Assets ....................................... 71
3.
AASB 140 Investment Property ........................................ 73
Appendix E – Comparison of fair value and deprival value..... 74
1.
Theoretical difference between fair value and deprival value 74
2.
Market value versus net market value ............................... 75
3.
Conclusion ..................................................................... 75
Appendix F – Guidance on appropriate discount rate for
general purpose financial reporting ............................. 76
1.
Conversion and comparability issues associated with a pre
versus a post tax weighted average cost of capital .............. 76
2.
NSW Treasury position .................................................... 77
Appendix G – Use of sampling in asset valuation ................... 78
New South Wales Treasury
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Preface
This Accounting Policy provides guidance for valuing physical non-current
assets at fair value for general purpose financial reporting, taking into account
the unique circumstances of the public sector. The aim is to provide relevant
and reliable information for decision making and ensure a consistent approach
to asset valuation across the NSW Public Sector.
Many assets in the public sector have few or no alternative uses in the existing
socio-political environment and many assets, including infrastructure assets, are
specialised. The Policy & Guidelines Paper therefore clarifies the meaning of
‘fair value’ for assets with few or no alternative uses.
The policy also provides practical guidance on valuing:




Land and buildings, including specialised and general buildings and
investment property;
Specialised plant and infrastructure assets;
Specialised assets that form part of a cash-generating unit; and
Heritage assets.
This Policy is applicable to all NSW public sector entities (including Statutory
State Owned Corporations) for financial years ending on or after 30 June 2007.
The Policy is consistent with the Australian Equivalents to International Financial
Reporting Standards (AEIFRS). It supersedes the previous NSW Treasury
Policy & Guidelines Paper of the same name (TPP 05-03).
Mark Ronsisvalle
for Secretary
NSW Treasury
April 2007
Treasury Ref:
ISBN:
TPP07-1
978-0-7313-3352-3
Note
General inquiries concerning this document should be initially directed to:
The Accounting Policy Section of NSW Treasury on (02) 9228 3019 or
e-mail: robert.williams@mail.treasury.nsw.gov.au
This publication can be accessed from the Treasury’s web site [www.treasury.nsw.gov.au/].
New South Wales Treasury
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Executive Summary
Physical non-current assets comprise a significant proportion of NSW public
sector assets. These assets are used to meet Government objectives and
desired outcomes through the delivery of goods and services. The purpose of
this Policy & Guidelines Paper is to provide practical guidance for valuing
physical non-current assets for general purpose financial reporting. This will
provide relevant and reliable information for decision-making and ensure a
consistent approach to asset valuation across the NSW Public Sector.
Subsequent to initial recognition, Australian Accounting Standards AASB 116
Property, Plant and Equipment and AASB 140 Investment Property require
assets to be valued at fair value or cost. In addition, property, plant and
equipment are subject to an impairment test in AASB 136 Impairment of Assets.
This paper provides guidance not provided in AASB 116, AASB 140 and AASB
136 to measure the fair value of assets taking into account the unique
circumstances in the public sector. Many assets in the public sector have few or
no alternative uses in the existing socio-political environment and many assets,
including infrastructure assets, are extremely specialised.
This Policy has been updated for amendments to the Australian equivalents to
International Financial Reporting Standards (AEIFRS) requirements applicable
to financial years ending on or after 30 June 2007. The main change is the
removal of the Australian Guidance to AASB 116. In practice, however, there
will be no difference for NSW public sector entities, as this Policy has been
amended, based on references to other similar requirements in other current
Accounting Standards, or by incorporating the withdrawn Guidance into this
Policy, where indicated.
In addition, further NSW Treasury guidance has been included in the Policy
distinguishing ‘investment property’ (that is subject to AASB 140) from other
property (refer section 3.3.2).
The main differences compared to the previous TPP 05-3 are summarised in
Appendix C. Differences identified on first time adoption of AEIFRS in 2005/06
compared to previous Accounting Standards and Treasury Policy are
summarised in Appendix D.
This Policy provides the following:

Fair value is measured having regard to the highest and best use for an
asset. However, where there are socio-political restrictions such that the
asset has no feasible alternative use in the near future, the asset is to be
valued at fair value for its existing use.

Where current market prices cannot be observed, an asset’s fair value in
AASB 116 is measured at depreciated replacement cost.

The income approach option in AASB 116 should not be applied for
specialised property, plant and equipment. This is because, for specialised
public sector assets, where there is no feasible alternative use, depreciated
replacement cost is the most relevant valuation method.
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
Replacement cost is measured by reference to the lowest cost of replacing
the economic benefits with a technologically modern equivalent optimised
asset, having regard to differences in the quality and quantity of outputs and
operating costs, and adjusting for over-design, overcapacity and redundant
components.

Assets that form part of a cash-generating unit must be written down where
the recoverable amount of the unit is lower than its carrying amount. The
recoverable amount of specialised assets that form part of a cashgenerating unit, in the absence of a market selling price, is the value in use,
based on the expected future cash flows.

For a not-for-profit entity, where an asset does not belong to or constitute a
cash-generating unit, it cannot be impaired under AASB 136, unless selling
costs are material.
Using the above, the policy provides separate practical guidance on how to
value:




Land and buildings, including specialised and general buildings and
investment property;
Specialised plant and infrastructure assets;
Specialised assets that form part of a cash-generating unit;
Heritage/cultural assets.
Further, the policy provides practical guidance on the following issues:




The difference between fair value and deprival value;
Issues associated with a pre-tax versus a post-tax weighted average cost of
capital;
For-profit / not-for-profit classification;
Use of sampling in asset valuation.
New South Wales Treasury
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1. Introduction
1.1
Purpose of Policy
The purpose of this Policy is to provide practical guidance for valuing physical
non-current assets for general purpose financial reporting.
Physical non-current assets comprise a significant proportion of NSW public
sector assets. These assets are used to meet Government objectives and
desired outcomes through the delivery of goods and services. The objective of
valuing these assets is to report on the value of economic benefits embodied in
the asset. This will provide relevant and reliable information for decision-making
about resource allocation, performance measurement and accountability and
ensure a consistent approach to asset valuation across the NSW Public Sector.
1.2
Fair value adopted
The purpose of financial reporting is to provide relevant and reliable information
for decision-making purposes. Based on this purpose, NSW Treasury’s view is
that fair value is the most relevant measurement attribute for physical noncurrent assets, and that sufficiently reliable estimates of the fair value of assets
can be determined.
After initial recognition, Australian Accounting Standard AASB 116 Property,
Plant and Equipment requires each class of non-current assets to be measured
using either the cost model or the revaluation model (i.e. on a fair value basis)
(AASB 116, para 29). Further, AASB 140 Investment Property requires all
investment property to be measured on either the cost model or the fair value
model. Consistent with past practice, this NSW Treasury policy requires that all
physical non-current assets, including investment property, be valued on the fair
value basis.
1.3
Application
This Policy is issued as a Treasurer’s Direction under section 9 and section 45E
of the Public Finance and Audit Act 1983 and therefore applies to all entities that
are required to prepare general purpose financial statements under the Act. The
Policy is also mandatory for Statutory State Owned Corporations. A specific
reference to the Policy will be included in the Statements of Corporate Intent of
those entities.
The Policy applies to all physical non-current assets, except:




Inventories (see AASB 102 Inventories);
Assets arising from construction contracts (see AASB 111 Construction
Contracts);
Biological assets (see AASB 141 Agriculture); and
Mineral rights and reserves and assets subject to AASB 6 Exploration for
and Evaluation of Mineral Resources.
This Policy applies to financial years ending on or after 30 June 2007. This
Policy is consistent with the relevant Australian equivalents to International
Financial Reporting Standards.
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These Guidelines replace the previous Treasury Policy and Guidelines Paper
(TPP 05-03), issued in November 2005. The main change compared to the
previous AEIFRS requirements is the removal of the Australian Guidance to
AASB 116. In practice, however, there will be no difference for NSW public
sector entities, as this Policy has been amended, based on references to other
similar requirements in other current Accounting Standards, or by incorporating
the withdrawn Guidance into this Policy, where indicated.
In addition, further NSW Treasury guidance has been included in the Policy
distinguishing ‘investment property’ (that is subject to AASB 140) from other
property (refer section 3.3.2).
The main differences compared to the previous TPP 05-3 are summarised in
Appendix C. Differences identified on first time adoption of AEIFRS in 2005/06
compared to previous Accounting Standards and Treasury Policy are
summarised in Appendix D.
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2. Overview of Valuation Policy
2.1
General property, plant and equipment
valuation principles
Physical non-current assets are to be valued at fair value in accordance with
Australian Accounting Standards AASB 116 Property, Plant and Equipment and
AASB 140 Investment Property. Fair value is defined as “the amount for which
an asset could be exchanged between knowledgeable, willing parties in an
arm's length transaction” (AASB 116, para 6, AASB 140, para 5).
The valuation of property, plant and equipment (excluding investment property)
is determined in a two-step process. First, “fair value” is determined in
accordance with AASB 116. Second, the AASB 116 “fair value” is subject to a
separate “impairment” test as part of AASB 136 Impairment of Assets.
Investment property is separately discussed in section 3.3. The concept and
definition of fair value in AASB 116 and AASB 140 are identical. Therefore,
while not strictly applicable, the AASB 116 fair value decision tree can be
equally applied to investment property subject to AASB 140. However, unlike
property, plant and equipment subject to AASB 116, investment property:


Is not subject to AASB 136 and impairment testing.
Is accounted for under the fair value model, with changes in fair value
recognised in the income statement rather than the asset revaluation
reserve (revaluation model).
2.1.1 Step one - Valuation principles in AASB 116
AASB 116 contains the following three principles to apply the above definition of
fair value:
1. Fair value is usually determined from market-based evidence (AASB 116,
para 32).
2. If there is no market-based evidence of fair value because of the specialised
nature of the item of property, plant and equipment, an entity may need to
estimate fair value using an income or a depreciated replacement cost
approach (AASB 116, para 33).
3. Revaluations must be made with sufficient regularity to ensure that the
carrying amount does not differ materially from that which would be
determined using fair value at the reporting date (AASB 116, para 31).
A full extract of the above paragraphs of AASB 116 is included at Appendix A.
The following decision tree reflects the above principles.
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STEP ONE - FAIR VALUE DECISION TREE IN AASB 116
Is there market-based
evidence of fair value?
(para 32)
YES
Fair value is measured
from market-based
evidence (para 32).
NO
Fair value is estimated
using an income or a
depreciated replacement
cost approach (para 33).
Revaluations: Fair value
revaluations to be made with
sufficient regularity to ensure
the carrying amount does not
differ materially from that
which would be determined
using fair value at the
reporting date (para 31).
Impairment: To determine
whether an asset is impaired,
apply AASB 136.
New South Wales Treasury
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2.1.2 Step two - Impairment principles in AASB 136
AASB 136 contains the following three principles to determine impairment:
1.
2.
3.
An entity must assess at each reporting date whether there is any
indication that an asset or cash-generating unit is impaired. If any such
indication exists, the entity must estimate the recoverable amount of the
asset or unit (AASB 136, para 9):

Recoverable amount is defined as the higher of an asset’s or cashgenerating unit’s fair value less costs to sell and its value in use (AASB
136, 6 and para 18).

Value in use is the present value of the future cash flows expected to
be derived from the asset or cash-generating unit (AASB 136, para 6
and paras 66-67), subject to below.
In respect of a not-for-profit entity, value in use is depreciated replacement
cost when the future economic benefits are not primarily dependent on the
asset’s ability to generate net cash inflows and where the entity would, if
deprived of the asset, replace its remaining future economic benefits
(AASB 136, para Aus6.1).
If, and only if, the recoverable amount of an asset or cash-generating unit
is less than its carrying amount, the carrying amount must be reduced to its
recoverable amount. That reduction is an impairment loss (AASB 136,
para 59) and is treated as a revaluation decrease in accordance with AASB
116 (AASB 136, para 60).
The following decision-tree reflects the above principles.
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STEP TWO - IMPAIRMENT DECISION TREE IN AASB 136
NO
No estimate of
recoverable
amount
required.
Is there any indication that an
asset or cash-generating unit
(CGU) is impaired? (para 9)
YES
Estimate the recoverable
amount (para 9).
Recoverable amount is the
higher of fair value less costs
to sell and “value in use”
(para 6).
Is the entity Not-For-Profit
AND are the future economic
benefits of the asset NOT
primarily dependent on the
asset’s ability to generate net
cash inflows and would the
entity replace the asset if
deprived of it? (para Aus6.1)
YES
“Value in use” is
the depreciated
replacement
cost (para
Aus6.1).
NO
“Value in use” is the present
value of future cash flows
expected to be derived from
the asset or the CGU (para 6).
If the recoverable amount is
less than the carrying amount
of the asset or CGU, write
down asset or CGU to that
amount (para 59).
New South Wales Treasury
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Clarification needed to apply the property,
plant and equipment and fair value principles
This Policy provides additional guidance needed to implement the principles of
AASB 116 and AASB 136 in Australia and the public sector. In the absence of
such guidance, diverse practices may occur that will undermine the relevance
and reliability of general purpose finance reports.
Additional NSW Treasury guidance is required to address the following public
sector issues:

The concept of “highest and best use” must be applied and clarified. The
majority of assets in the public sector have either no, or limited, feasible
alternative uses in the existing socio-political environment. This is because
these assets are held as community, cultural or heritage assets and/or the
government entity is mandated to continue to provide the services permitted
by the assets.

The current market prices of the majority of public sector assets cannot be
observed because of either the specialised nature of the assets or
significant imperfections in the markets in which the assets are traded.

In the absence of market-based evidence, entities may estimate fair value
using either the depreciated replacement cost or income approach. The
Standard, however, provides little guidance on how to apply these
approaches.

The economic benefits of the majority of assets in public sector are not
primarily dependent on their ability to generate net cash inflows.
As a result, guidance is needed for the following types of assets:





Land such as botanic gardens, national parks and land under specialised
assets;
Community properties including schools, hospitals, etc;
Specialised infrastructure assets and buildings;
Heritage and cultural assets, including library, museum and some art
collections;
Specialised assets forming part of a cash-generating unit.
This paper therefore provides guidance additional to that in AASB 116 and
AASB 136 on the following:




Applying AASB 116 principles to the above public sector issues (see
Section 2.3).
Applying AASB 136 principles to cash-generating units (see Section 2.4 and
Section 5).
Clarifying the AASB 116 and AASB 136 decision trees (see Section 2.5).
Applying the Policy to the major categories of physical non-current assets
(Sections 3 to 6 and Appendix B).
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Step one - Guidance to apply AASB 116
valuation principles
The following additional guidance is provided to apply the three valuation
principles in AASB 116 to the unique circumstances of the public sector.
2.3.1 Fair value of assets is to be measured at highest and
best use
AASB 116 merely states that fair value “is the amount for which an asset could
be exchanged between knowledgeable, willing parties in an arm’s length
transaction” (AASB 116, para 6). This Policy clarifies that the fair value of an
1
asset :




Is the most advantageous price reasonably obtainable by the seller and the
most advantageous price reasonably obtainable by the buyer.
Presumes the entity is a going concern, without any intention to liquidate or
materially change the scale of operations.
Presumes that there is an adequate period of marketing.
Excludes an estimated price inflated or deflated by special terms or
circumstances such as atypical financing, sale and leaseback
arrangements, special considerations or concessions granted by anyone
associated with the sale.
Further, this Policy clarifies that fair value is determined by reference to its
‘highest and best use’ taking into account the existing physical, legal, financial
and socio-political environment in which the entity operates and which results in
2
the highest value .
The concept of the highest and best use is also consistent with the approach
adopted by economists and valuers. In applying the willing buyer and seller
principle, valuers generally measure fair value or “market value based on its
highest and best use, which will not necessarily be the existing use”. The
argument is that “the prudent and well informed vendor would not willingly part
with his land for a price less than that appropriate to its highest and best use;
and the prudent buyer would not expect to be able to purchase it for less. Each
party would take into account not only the present purpose to which the land is
applied, but also any more beneficial purpose to which, in the course of events
at no remote period, it may be applied” (quote of Isaacs J in the High Court
decision of Spencer V the Commonwealth of Australia (1907) 5 CLR 148 quoted
in R.O. Rost and H.G. Collins Land Valuation and Compensation in Australia).
1
This guidance is also consistent with the principles outlined in:

AASB 101 Presentation of Financial Statements (AASB 101, para 23)

AASB 139 Financial Instruments: Recognition and Measurement (AASB 139, paras AG69 and
AG71);

AASB 140 Investment Property (AASB 140, paras 36 and 43).
2
This is consistent with the principles in the IASB Discussion Paper on Fair Value Measurements,
based on the equivalent FASB Standard No. 157 (SFAS 157, para 12).
New South Wales Treasury
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Although this quote applies to land, it is equally applicable to any asset.
Therefore, the term ‘highest and best use’ is clarified (and qualified) by “any
more beneficial purpose to which, in the course of events at no remote period, it
may be applied”.
Given the above, guidance is needed to apply ‘highest and best use’ consistent
to the unique circumstances in the public sector.
In the public sector, there can be natural, legal, financial and socio-political
restrictions on the use and disposal of assets. In fact, most assets in the general
government sector are held as community, cultural or heritage assets. Further,
most entities are mandated by government/ministerial directives or
legal/administrative requirements to continue to provide the services that the
assets assist them in providing. Therefore, the natural, legal, financial and
socio-political environments are relevant because they impact on the
opportunities available to the entity. These restrictions may mean that certain
opportunities or alternative uses are not available and therefore should not be
taken into account.
From the above, the following three general policy guidelines can be drawn in
applying the principle that fair value is to be measured having regard to the
‘highest and best use’ of the asset:

‘Highest and best use’ means a feasible alternative use. It therefore must
take account of (or is qualified by) the existing natural (or physical), legal,
financial and socio-political environment in which the entity operates (as well
as the general zoning and statutory restrictions in respect of land).

‘Highest and best use’ means a feasible alternative use that is not remote. A
practical guide to this is that an alternative use should only be considered to
be feasible where it can be demonstrated that it can be achieved in the
relatively near future (say the next five years) rather than at some remote
future time.

‘Highest and best use’ must take account of the costs of achieving the
feasible highest and best use alternative. These costs include holding costs,
the costs required to provide utilities, the costs for any rezoning of the land
and the costs of restoration or removal of existing improvements and/or
reparation work to restore the land to useable condition for that alternative
use.
Based on the above, the following policies apply in valuing assets having regard
to ‘highest and best use’:

Fair value of assets should be measured having regard to ‘highest and best
use’ (net of costs to achieve that use) when and only when there exist
feasible alternative uses in the existing natural, legal, financial and sociopolitical environment and the alternative uses are feasible within the near
future. Such assets include much land and general use buildings.

Conversely, where there are natural, legal, financial or socio-political
restrictions on use and disposal of an asset, such that there is no feasible
alternative use in the relatively near future, such an asset should be valued
at fair value for its existing use. This is because fair value determined by
reference to its highest and best use means “existing use” where there is no
feasible alternative use.
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Assets with no feasible alternative use include botanic gardens, national
parks, most community assets such as schools and hospitals, some
heritage properties, library and museum collections and most specialised
assets (e.g. water and sewerage systems).
Valuing assets at “Fair (or Market) Value for Existing Value” (or “Existing
Use”) contemplates the continued use of an asset in contributing to the
objectives and outcomes of the entity. This is not the value to the specific
existing owner, but the value to a class of owners that would continue the
existing use.
The above clarification acknowledges that the concept of ‘highest and best use’
is not a black and white distinction; but allows possibilities within a spectrum.
There are cases where there are few or restricted feasible alternative uses. For
example, land under heritage buildings and the heritage buildings may have few
or limited restricted potential for development for feasible alternative uses.
Further guidance is given in Section 3 in applying the above to land and
buildings.
2.3.2 Fair value is determined by the best available market
evidence
AASB 116 states that “…the fair value of land and buildings is usually
determined from market-based evidence…” (AASB 116, para 32). The
withdrawn Australian Guidance to AASB 116 clarified this as follows:
“Where a quoted market price in an active and liquid market is available
for an asset, that price represents the best evidence of the asset’s fair
value. When a quoted market price for the asset in an active and liquid
market is not available, the fair value is estimated by reference to the
best available market evidence of the price for which the asset could be
exchanged between knowledgeable, willing parties in an arm’s length
transaction. This evidence includes current market prices for assets
that are similar in use, type and condition (‘similar assets’) and the price
of the most recent transaction for the same or a similar asset (provided
there has not been a significant change in economic circumstances
between the transaction date and the reporting date). Current market
prices for the same or similar assets can usually be observed for land,
non-specialised buildings, used motor vehicles, and some forms of plant
and equipment. For land and buildings, these prices can also be
derived from observable market evidence (e.g. observable current
market rentals) using discounted cash flow analysis” (AASB 116,
withdrawn Australian Guidance, para G3).
This above withdrawn Guidance is incorporated as part of this Policy 3.
3

This is also consistent with the concept of fair value discussed in:
AASB 136 Impairment of Assets (AASB 136, paras 25-27);

AASB 139 Financial Instruments: Recognition and Measurement (AASB 139, paras AG71 and
AG74); and

AASB 140 Investment Property (AASB 140, paras 45-46).
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2.3.3 Fair value where market prices cannot be observed
AASB 116, para 33 provides:
“If there is no market-based evidence of fair value because of the
specialised nature of the item of property, plant and equipment and the
item is rarely sold, except as part of a continuing business, an entity
may need to estimate fair value using an income or a depreciated
replacement cost approach.”
Further, the withdrawn Australian Guidance to AASB 116 clarified this further,
as follows:
“In some circumstances the fair value of the asset is not able to be
determined from market-based evidence as the market buying price and
market selling price of an asset differ materially because the asset
usually is bought separately in the new asset market, but if sold
separately, could only be sold for its residual value.” (AASB 116,
withdrawn Australian Guidance, para G4)
This above withdrawn Guidance is incorporated as part of this Policy.
In the public sector, the specialised nature of most physical non-current assets
and/or significant imperfections in the markets in which they are traded may
preclude the current market selling price from being observed. Public sector
specialised assets include most infrastructure assets, land under infrastructure,
roads and certain heritage and cultural assets.
Given the above, guidance is needed to apply the concept of depreciated
replacement cost and the income approach to the specialised assets in the
public sector (see below in sections 2.3.4 and 2.3.5).
2.3.4 Guidance on depreciated replacement cost
Depreciated replacement cost is a market buying price. As noted at section
2.3.3, guidance is needed to apply the concept of depreciated replacement cost,
because AASB 116 does not provide any direction. However, AASB 136 states
that:
“Depreciated replacement cost is the current replacement cost of an
asset less, where applicable, accumulated depreciation calculated on
the basis of such cost to reflect the already consumed or expired future
economic benefits of the asset” (AASB 136, para Aus6.2).
Replacement cost is not necessarily the cost of replicating the asset. Instead,
replacement cost is defined as the “lowest cost at which the gross future
economic benefits of that asset could currently be obtained in the normal course
of business” (AASB 136, para Aus32.2).
What this means in general terms is that the replacement cost is determined by
reference to the lowest cost of replacing the gross service potential embodied in
the existing asset with a technologically modern equivalent asset, allowing for
any differences in the quantity and quality of output and operating costs, and
adjusting for overdesign, overcapacity and redundant components. For
depreciable assets the carrying amount only reflects the remaining service
potential. Therefore, the gross replacement cost is reduced by the economic
benefits consumed or expired.
Further guidance is given in Section 4 in applying the above to specialised plant
and infrastructure assets.
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Some commentators, however, note that AASB 116 allows the option of using
an income approach. The Policy does not allow this option for specialised
assets, for the reasons discussed at section 2.3.5.
2.3.5 Why an income approach should not be used to value
specialised assets, where there is no market-based evidence
of fair value
Section 2.3.5 has been omitted by NSWTC 12/05. Refer Treasury Circular
for more details.
In the absence of market evidence, AASB 116 provides that either depreciated
replacement cost or an income approach may be used to estimate fair value
(AASB 116, para 33).
Some commentators note that the Standard allows the option of using an
income approach. These commentators therefore suggest that ‘value in use’ in
AASB 136 could be used as an application of the income approach and
therefore as a surrogate for fair value in AASB 116. This is based on the view
that the requirements of AASB 116 and AASB 136 can be met simultaneously
by using the income approach.
The Standards, however, do not provide any direction on what is meant by an
“income approach” or when to apply it. The following therefore provides
guidance on this matter. This Policy concludes that depreciated replacement
cost rather than an income approach should be used under AASB 116 as the
primary valuation method for valuing specialised assets for the following main
reasons:

Nature of public sector assets - The majority of public sector assets are
specialised infrastructure assets, with no feasible alternative use (refer
section 2.3.1). The specialised nature of these assets may preclude the
current market selling price from being observed. Further, such entities
must continue to provide the government mandated services and replace
the existing service potential embodied in those assets. Given this,
depreciated replacement cost is the most relevant valuation method for
specialised assets.

Contrary to the two-step approach in AASB 116 and AASB 136 – Currently
the Australian Accounting Standards Board (AASB) has adopted a two-step
process for valuing physical assets. First, fair value is measured under
AASB 116 and second, the fair value is tested for impairment under AASB
136. Therefore, the use of the AASB 136 “value in use” measure for the
income approach in AASB 116 is contrary to the current two-step approach
of the AASB. Further, the use of the two step approach is consistent with
draft guidance provided by the IASB / AASB, which advocates the use of
multiple valuation techniques, as appropriate (see following dot point).

Consistent with international developments - Internationally, the IASB /
AASB have issued Discussion Papers based on an equivalent FASB
Standard reviewing alternative methods to measure fair value. In discussing
the income approach, these Discussion Papers emphasise market evidence
in active markets. As discussed, however, for specialised assets there is
unlikely to be market evidence. This results in the need to measure fair
value at depreciated replacement cost (i.e. market buying price), as a more
relevant surrogate for fair value, and leads to a conclusion not to use an
income approach.
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
Income approach is more relevant in some circumstances and less relevant
in other circumstances - The income approach is relevant and used where
there is market-based evidence and is most frequently used for nonspecialised commercial properties where there is a liquid market.
Conversely, the income approach is less relevant in valuing specialised
assets. In these circumstances, the use of significant entity inputs derived
from an entity’s own internal inputs and assumptions is required. However,
this is in essence the concept of “value in use” used in AASB 136. This is
done as the second step in the valuation process, by means of the
impairment test in AASB 136.

Depreciated replacement cost information provides valuable decisionmaking information – It provides information for users and the shareholder
regarding the cost to replace the existing asset base. It also provides
valuable information for entities where prices are set by an independent
regulator. The entity requires knowledge of replacement cost so it can
determine whether the entity will be able to replace its assets and therefore
remain sustainable in the long term. This information is also required to
advise the price regulator, otherwise, prices may be set too low to enable it
to replace its assets and this may erode the economic capacity of the entity.

Adopting replacement cost enhances transparency and accountability – If a
write down is required under the impairment test pursuant to AASB 136, this
will highlight the reasons for a downward revaluation – such as:

The impact of any regulatory or government policy decision which
impacts on an agency’s capacity to derive an appropriate return from
the asset in question; or

Building capacity based on long-term demand forecasts which did not
eventuate.
In NSW Treasury’s view, although there are alternative views on this issue,
there is no solution that suits all purposes - accounting, performance monitoring
and price regulation. Given this, and since this issue is currently being
examined by both the IASB and AASB, Treasury prefers to retain the pragmatic
solution of using multiple valuation techniques, using the two step approach.
In summary, pending future developments by the Accounting Standard-setters,
this Policy requires that, in the absence of market evidence, specialised assets
must be valued using the depreciated replacement cost approach rather than
using the income approach in AASB 116. However, the depreciated
replacement cost is then subject to separate impairment testing in AASB 136,
based on value in use.
This issue is further discussed at section 3.2.2 (specialised building) and section
4 (specialised plant and infrastructure).
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2.3.6 Frequency of revaluation
Where non-current assets are measured at fair value, AASB 116 states:
“Revaluations shall be made with sufficient regularity to ensure that the
carrying amount does not differ materially from that which would be
determined using fair value at the reporting date…The frequency of
revaluations depends upon the changes in fair values of the items of
property, plant and equipment being revalued. When the fair value of a
revalued asset differs materially from its carrying amount, a further
revaluation is required. Some items of property, plant and equipment
experience significant and volatile changes in fair value, thus
necessitating annual revaluation” (AASB 116, paras 31 and 34).
In effect, AASB 116 requires that an entity assesses at each reporting date
whether there is any indication that an asset’s carrying amount differs materially
from fair value. If any indication exists, the asset (and class to which it belongs)
must be revalued (AASB 116, para 36).
This is consistent with the requirement in AASB 136 to assess whether there is
any indication that an asset may be impaired. Therefore, when assessing
whether there is any indication that the carrying amount differs materially from
fair value in AASB 116, reference should be made to the minimum indicators in
AASB 136. This includes external and internal sources of information, where
relevant (refer AASB 136, para 12 and 111 and section 5.2 of the Policy). This
includes indicators of both adverse and favourable effects.
These indicators are not exhaustive. For example, there may be other relevant
factors or indicators that a revalued asset’s carrying amount may differ
4
materially from its fair value, that are not included in AASB 136 ; e.g. other
external sources of information – during the period, a price index relevant to the
asset has undergone a material change.
Subject to the above, NSW Treasury’s policy requires that all classes of
property, plant and equipment must be revalued at least every five years.
2.4
Step two - Guidance to apply AASB 136
impairment principles
The second step in valuing property, plant and equipment is to test for
impairment. AASB 136 provides extensive guidance on the impairment
principles. The following additional guidance is provided to apply the three
principles in AASB 136 (paras 9, Aus6.1 and paras 59-60, see section 2.1.2
above) to determine impairment to the unique circumstances of the public
sector.
4
This factor was referred to in the withdrawn Australian Guidance to AASB 116 (para G7).
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2.4.1 Meaning of “fair value less costs to sell” in the
recoverable amount test
AASB 136 requires an entity to assess at each reporting date whether there is
any indication that an asset or cash-generating unit may be impaired. If any
such indication exists, the entity must estimate the recoverable amount (AASB
136, para 9). Recoverable amount is defined as the higher of fair value less
costs to sell and value in use (AASB 136, para 6).
The recoverable amount test is based on the premise that the value of an asset
or cash-generating unit should not exceed the higher of its market-based
valuation (fair value less costs to sell) and the entity specific valuation based on
expected future cash flows (“value in use”) (AASB 136, para 6).
“Fair value” in AASB 136 is defined identically to AASB 116. However, its
application in AASB 136 is more limited than AASB 116. The commentary on
“fair value less costs to sell” in AASB 136 (paras 25-29) refers to market-based
valuations only, as evidenced by binding sale agreements, current bid prices or
recent transactions for similar assets. Unlike AASB 116, AASB 136 does not
envisage or refer to situations where there is no market-based evidence.
Therefore AASB 136 has a narrower concept of fair value than AASB 116, as it
effectively excludes fair value, in the absence of market evidence. That is, “fair
value less selling costs” in AASB 136 is restricted to the net market selling price
(refer IFRS 5, Basis for Conclusions, paras BC82-BC83).
In the public sector, however, the specialised nature of most physical noncurrent assets means that due to the lack of market-based evidence, a market
selling price is unlikely to be available. As a result, for specialised assets, in the
absence of a market selling price, the recoverable amount is the value in use.
AASB 136 confirms this as it states that where there is no basis for making a
reliable estimate of the amount obtainable from an arm’s length sale, the entity
may use the asset’s value in use as its recoverable amount (AASB 136, para
20).
This means that specialised assets that form part of a cash-generating unit must
be written down where the value in use of the unit, based on the expected future
cash flows (per AASB 136), is lower than the total of the fair value of the assets
(AASB 136, paras 104-108), which for specialised assets will be based on
depreciated replacement cost (per AASB 116 and section 2.3.5 of the Policy).
2.4.2 Recoverable amount for a cash-generating unit
AASB 136 requires the recoverable amount to be estimated for the individual
asset, or if not possible, the cash-generating unit (AASB 136, para 66). The
cash-generating unit is defined as:
“…the smallest identifiable group of assets that generates cash inflows
that are largely independent of the cash inflows from other assets or
groups of assets” (AASB 136, para 6)
The recoverable amount for an individual asset cannot be determined if:
“(a) the asset’s value in use cannot be estimated to be close to its fair
value less costs to sell (e.g. when the future cash flows from
continuing use of the asset cannot be estimated to be negligible);
and
(b) the asset does not generate cash inflows that are largely
independent of those from other assets.”
(AASB 136, para 67)
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Stated another way, the recoverable amount for an individual asset can only be
determined if it constitutes a cash-generating unit in itself. This is also
supported by AASB 136, para 22.
Therefore, this Policy clarifies the AASB 136 decision tree by using the term
“cash-generating unit” to also include reference to an individual asset that
constitutes a cash-generating unit.
2.4.3 Recoverable amount test – Application to not-for-profit
entities
The recoverable amount test is complicated in the public sector for not-for-profit
entities, where assets do not form part of a cash-generating unit, as they are not
held primarily for profit generation.
The AASB has addressed this issue by re-defining the concept of “value in use”
for these assets of not-for-profit entities, as follows:
“…in respect of not-for-profit entities, value in use is depreciated
replacement cost of an asset when the future economic benefits of the
asset are not primarily dependent on the asset’s ability to generate net
cash inflows and where the entity would, if deprived of the asset,
replace its future economic benefits” (AASB 136, para Aus6.1)
A “not-for-profit entity” is defined as “an entity whose principal objective is not
the generation of profit” (AASB 136, para Aus6.2). Therefore a “for-profit entity”
is an entity whose principal objective is the generation of profit. Classification as
a for-profit or not-for-profit entity is further discussed in section 5.4.
Although not explicit in the Standard, the practical effect of the modified
definition of “value in use” is to modify the concept of a cash-generating unit for
not-for-profit entities. Accordingly, this Policy clarifies that:
“For a not-for-profit entity, an asset does not form part of a cashgenerating unit when the future economic benefits of the asset are not
primarily dependent on the asset’s ability to generate net cash inflows
and where the entity would, if deprived of the asset, replace its
remaining future economic benefits” (AASB 136, para Aus6.1) (added
Treasury words identified in bold)
Alternatively, this has the same effect as modifying the definition of a cashgenerating unit as follows:
“…the smallest identifiable group of assets comprising those assets
that are primarily dependent on the assets’ ability to generate cash
inflows that are largely independent of the cash inflows from other
assets or groups of assets” (AASB 136, para 6) (added Treasury words
identified in bold)
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In effect, this means that a “cash-generating unit” is a unit whose primary or
principal objective is profit generation. This is similar to the definition for a forprofit entity. This has a number of implications that are clarified in this Policy, as
follows:



The definition for “value in use” depends on whether an asset forms part of
a cash-generating unit. By definition, all assets of a for-profit entity belong to
one or more cash-generating unit/s. This is further discussed in section 5.5.
A not-for-profit entity may have cash-generating unit/s. However, an
operation of a not-for-profit entity that has a number of objectives, but where
generating profit is not the primary objective, is excluded from the definition
of a cash-generating unit. The distinction between a for-profit and not-forprofit entity discussed at section 5.4 is also relevant to a not-for-profit entity
and the distinction between a cash-generating and non-cash-generating
unit.
Where an asset of a not-for-profit entity does not belong to a cashgenerating unit, it cannot be impaired under AASB 136, unless selling costs
are material. This is the case, whether or not the ‘value in use’ is
depreciated replacement cost (AASB 136, para Aus6.1). This is because
the recoverable amount cannot be lower than fair value in AASB 116,
unless selling costs are material, as the following two possible scenarios
demonstrate i.e.:


For an asset that is not primarily dependent on the generation of net
cash inflows and if the entity would replace the asset, if deprived of it,
the ‘value in use’ is depreciated replacement cost (AASB 136, para
Aus6.1) – Fair value under AASB 116 will be determined using marketbased evidence (e.g. market selling price), or in its absence, based on
depreciated replacement cost. Fair value under AASB 116 will either
be the same as fair value or ‘value in use’ under AASB 136.
For an asset that is not primarily dependent on the generation of net
cash inflows and if the entity would not replace the asset, if deprived of
it, the ‘value in use’ is based on discounted cash flows (AASB 136, para
6) – Fair value under AASB 116 will be determined using market selling
price (refer section 4.4.2 and Appendix B, section 3.3 of the Policy).
Fair value under AASB 116 will be the same as fair value under AASB
136.
In NSW Treasury’s view, in most cases selling costs will not be material. In
effect, for a not-for-profit entity, this exempts assets that are not primarily
dependent on the generation of net cash inflows from AASB 136 and
impairment testing. This is because there is no material dollar impact.
Additional guidance about the level of the cash-generating unit is provided at
section 5.3.
2.5
Clarified decision trees
The guidance in sections 2.3 and 2.4 leads to the inclusion of additional or
modified steps to apply the principles in AASB 116 and AASB 136, as
highlighted in the following decision trees. These additional or modified steps do
not alter the decision trees derived from the respective Standards. Instead they
provide clarification and additional guidance relevant to the circumstances in the
public sector.
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TREASURY’S FAIR VALUE DECISION TREE WHICH CLARIFIES AASB 116
YES
Are there feasible alternative
uses for the asset? i.e. a use
that is feasible in the existing
natural, legal, financial and
socio-political environment
(section 2.3.1).
NO
Fair Value at highest and
best use means existing
use value (section 2.3.1)
Measure Fair Value at
highest and best use of
feasible alternatives
(section 2.3.1)
Is a quoted market price in an active and liquid
market available for the asset? (section 2.3.2)
YES
NO
Best evidence of Fair Value
YES
Estimate of Fair Value
Note - Bold writing in the
decision tree represents
additional Treasury Policy.
Paragraph references in bold
refer to relevant sections in
Treasury’s Policy. Other
(non-bold) paragraph
references refer to relevant
paragraphs in AASB 116.
What is the best available market
evidence available? Are there
current market selling prices or
recent transaction prices
available for the same assets or
assets that are similar in use,
type and condition? This
includes observable current
market rentals for nonspecialised property (section
2.3.2).
NO
Where no market-based evidence is
available, fair value is estimated using a
depreciated replacement cost or an
income approach (para 33), subject to
below.
However, Treasury’s policy is that for
specialised PP&E, in the absence of
market evidence, entities must apply
depreciated replacement cost rather
than an income approach (section
2.3.5). [Amended NSWTC 12/05].
Replacement cost means the
minimum cost of an optimised
modern equivalent asset (section 4).
Revaluation: Assess at each reporting date whether there is any indication that a revalued asset’s
carrying amount may differ materially from that which would be determined if the asset were revalued
at the reporting date (AASB 116, para 31). Consider external and internal sources of
information. Subject to the above, Treasury’s policy is to require all classes of PP&E to be
revalued at least every 5 years (section 2.3.6).
Impairment: To determine whether an asset is impaired, apply AASB 136.
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TREASURY’S IMPAIRMENT DECISION TREE CLARIFYING AASB 136
NO
Is there any indication that an asset or
cash generating unit (CGU) is impaired?
(para 9)
No estimate of
recoverable
amount required.
YES
Note - Bold writing in
the decision tree
represents
additional Treasury
Policy. Paragraph
references in bold refer
to relevant sections in
Treasury’s Policy. Other
(non-bold) paragraph
references refer to
relevant paragraphs in
AASB 136.
Estimate the recoverable amount.
(para 9)
Recoverable amount is the higher of fair
value less costs to sell and “value in use”
(para 6).
For specialised assets, in the absence
of a market selling price, recoverable
amount is the “value in use”
(section 2.4.1).
Does the asset form part of a cash
generating unit (section 2.4.2)?
All assets of a “for-profit-entity”
belong to a cash generating unit
(section 2.4.3).
For a “not-for-profit entity”, an asset
does not form part of a CGU when the
future economic benefits of the asset
are not primarily dependent on the
asset’s ability to generate net cash
inflows and where the entity would, if
deprived of the asset, replace its
remaining future economic benefits
(para Aus6.1 and section 2.4.3).
NO
“Value in use” is the
depreciated
replacement cost
(para Aus 6.1).
YES
“Value in use” is the present value of
future cash flows expected to be derived
from the CGU (para 6).
The asset is NOT
impaired, unless
selling costs are
material (section 2.4.3).
If the recoverable amount is less than the
carrying amount of the asset or CGU, write
down asset or CGU to that amount
(para 59).
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Valuation of land and buildings (including
investment property)
This section discusses the valuation of land and buildings (including investment
property) under AASB 116 and AASB 140. Impairment under AASB 136 is
separately discussed in section 5.
3.1
Valuation of land
Land is to be valued at fair value in accordance with AASB 116 having regard to
the highest and best use that is feasible (section 2.3.1).
Land should be valued at fair value and measured having regard to the ‘highest
and best use’ when and only when there exist feasible alternative uses in the
existing natural, legal, financial and socio-political environment and the
alternative uses are feasible within the near future. Further, it is measured after
taking account of the costs of achieving the highest and best use.
In assessing feasible alternative use, general zoning restrictions should be
distinguished from restrictions placed on land by Government that are in the
nature of restrictions on current use. An example is an agricultural research
station on the fringe of an expanding urban development. It is not to be
assumed that the only use to which this land could be put in the future would be
for this specific purpose. Where there is special zoning it may reflect the
mechanism by which the government, as owner, recognises its current use.
These restrictions, even if reflected in special zoning, should not provide the
basis on which the feasible alternative use valuation is determined. The types of
zoning that would usually be relevant are the general types of zoning
(residential, commercial and industrial).
In the public sector, much land can be valued having regard to highest and best
use. This includes Crown land that is designated for development and disposal,
and land under general purpose buildings or generalised plant.
In the public sector, however, there can be natural, legal, financial or sociopolitical restrictions on the use and disposal of land. Much land in the public
sector is held as community, cultural or heritage assets or is land under assets
held for such purposes. Further, most entities are mandated by
government/ministerial directives or legal/administrative requirements to
continue to provide the services that the land assists them in providing.
Where there are natural, legal, financial or socio-political restrictions on use and
disposal of land such that there is no feasible alternative use in the relatively
near future, such land should be valued at fair (market) value for its existing use.
That is, opportunities that are not available to the entity are not taken into
account (section 2.3.1). Land assets in the public sector with no feasible
alternative use include parks and botanic gardens, national parks and reserves
that are held for public benefit and vacant Crown land.
Further, mandates for service delivery may impose restrictions on the use of
land under specialised buildings or infrastructure assets held and used for
mandated purposes. Such mandates may eliminate any possible highest and
best use value related to an alternative use or arising from any redevelopment
potential of the land. For example, examination of NSW railway corridors
indicates that few sections in the metropolitan area have potential for alternative
use.
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Similarly, feasible uses for land under Parliament House, Government House
and historic and similar heritage buildings are restricted to the extent of the
restricted feasible alternative uses of the buildings.
For other land under assets, the land may have feasible alternative uses
because it may be feasible to relocate the assets used in providing the service.
A fire station located in the centre of a country town may be moved to the
outskirts. In other cases, the asset on the land may no longer be required in that
location because of changes in demographics over time or consolidation of
services for strategic and efficiency reasons. Assets such as schools and
hospitals can become surplus in particular circumstances and therefore the land
can become available for feasible alternative uses. Generally, this would be
supported by a government decision that the asset is surplus. Therefore, the
highest and best use of the land and improvements are assessed together. In
these circumstances, an entity must also consider whether the item meets the
definition of an “asset held for sale”, which is discussed in section 7.10. For
land under most schools, hospitals and fire stations, there is no alternative use,
because the entity is mandated to continue to provide the services and the
services are needed at that location.
Regarding reliable measurement, current market prices (whether measured at
highest and best use or existing use) usually can be observed for land (AASB
116, para 32). They can also be derived from observable market evidence, for
example, observable current market rentals for leased land (see also section 3.2
below).
Detailed guidelines for the valuation of specific types of assets including Crown
lands, national parks and reserves, parks and botanic gardens and land under
general and specialised buildings, and land under specialised plant,
infrastructure and heritage assets are set out in Appendix B.
3.2
Valuation of buildings
Buildings are to be valued at fair value in accordance with AASB 116. In all
cases, buildings and the land on which they are built must be considered
together in determining whether feasible alternative uses exist.
AASB 116 discusses the types of market-based evidence for property, plant and
equipment. The Standard implicitly acknowledges that there are specialised
and non-specialised assets (AASB 116, para 33).
3.2.1 Non-specialised buildings
Non-specialised buildings include commercial and general purpose buildings for
which there is a secondary market. Non-specialised property is to be valued at
fair value having regard to highest and best use. The building and the land
under the building are valued consistently.
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Fair value based on current market prices can usually be observed for land and
non-specialised buildings (AASB 116.32). In the absence of observable market
prices, current market prices can also be derived from observable market
evidence (e.g. observable current market rentals) using discounted cash flow
analysis (section 2.3.2). This is an application of the income approach allowed
under AASB 116, para 33. As this uses market-based evidence, it is permitted
by this Policy (refer section 2.3.5).
3.2.2 Specialised buildings
Conversely, specialised buildings are buildings designed for a specific limited
purpose. Such buildings include hospitals, schools, court houses, emergency
services buildings (police, fire, ambulance and emergency services stations),
specialised buildings to house specialised infrastructure or plant and some
heritage properties.
In most cases, such specialised buildings and the land under them have no
feasible alternative use, because the entity is mandated to continue to provide
the goods or services that the building permits. Further, where a building is
specialised, there is generally no observable market evidence of its market
selling price. As discussed previously in section 3.1, there are exceptions to this
where the services can be moved to another location or are no longer required,
either for strategic reasons or because of demographic changes.
Where there is no available market-based evidence, specialised buildings are to
be valued at the replacement cost of the asset’s remaining economic benefits.
This is consistent with the view adopted by this Policy for the valuation of
specialised assets, as discussed in Section 2.3.5.
The above distinction between specialised and non-specialised buildings exists
on a spectrum and is not black and white. Professional judgment is therefore
required. To illustrate, the valuation of specialised plant and infrastructure must
be adjusted for permanent excess capacity. For some specialised buildings,
however, excess capacity may have feasible alternative uses. For example,
excess capacity in a hospital may be able to be leased out to another entity for
medical-related services, but it would need to be demonstrated that a feasible
alternative use exists. In these demonstrated cases, the excess may not be
permanent excess capacity.
The valuation of specialised plant and infrastructure assets is further discussed
at Section 4. Impairment testing of specialised assets that form part of a cashgenerating unit is discussed at Section 5. Heritage buildings are discussed at
Section 6.
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3.3
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Valuation of investment property
3.3.1 Fair value model adopted
Consistent with the valuation of property, plant and equipment, this Policy
requires that, after initial recognition, investment property must be measured at
fair value (refer section 1.2 of the Policy).
Unlike AASB 116 Property, Plant and Equipment, AASB 140 adopts a fair value
model rather than a revaluation model. This means that for investment
property, any changes in fair value are recognised in the income statement
rather than the asset revaluation reserve (AASB 140, para 35). Further,
depreciation is not recognised as AASB 116 does not apply (AASB 116, para 5)
and investment property measured at fair value is not subject to the AASB 136
impairment test (AASB 136, para 2(f)).
3.3.2 Distinguishing investment property from other property
Investment property is “property (land or a building – or part of a building – or
both) held (by the owner or by the lessee under a finance lease) to earn rentals
or for capital appreciation or both, rather than for:
(a) Use in the production or supply of goods or services or for
administrative purposes; or
(b) Sale in the ordinary course of business” (AASB 140, para 5).
Investment property also includes property held for a currently undetermined
future use (AASB 140, para 8).
It excludes “owner-occupied property” and property held for a determined future
use as either owner-occupied property or investment property (AASB 140, paras
5, 9(c) and 9(d)).
In the case of a not-for-profit entity, investment property also excludes property
held to meet service delivery objectives rather than to earn rental or for capital
appreciation. Investment property therefore excludes property held for strategic
purposes and property held to provide a social service, such as those which
generate cash inflows where the rental revenue is incidental to the purpose for
holding the property (AASB 140, para Aus9.1). However, a not-for-profit entity is
not precluded from having investment property merely because of its not-forprofit status.
An investment property generates cash flows largely independently of the
entity’s other assets. This distinguishes it from owner-occupied property (AASB
140, para 7).
Investment property is recognised and measured under AASB 140. Conversely,
owner-occupied property and property held by a not-for-profit entity to meet
service delivery objectives are recognised and measured as property, plant and
equipment under AASB 116. Determining the correct classification requires the
use of judgement, having regard to the primary reason for holding the property.
A lessor classifies a rental property (under an operating lease) as either
investment property or as property, plant and equipment, depending on the
particular circumstances of the case.
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This policy clarifies that the earning of rent, even commercial rent, does not
necessitate a property being classified as investment property if the property is
primarily held for another purpose and the rent is merely incidental, such as
when:
 A not-for-profit entity holds a property primarily to meet service delivery,
strategic or social service objectives (AASB 140, para Aus9.1); or
 A for-profit entity holds a property for its own future occupancy (AASB 140,
para 9).
An agency’s enabling legislation will often help determine the agency’s reason
for holding property.
A NSW public sector agency’s primary reason for holding any particular rental
property (as lessor) will usually be determinable by reference to the agency’s
overall objectives and its for-profit or not-for-profit status. Treasury therefore
considers that, unless the lessor agency can demonstrate the contrary:



Any property subject to a long-term lease (exceeding 50 years) is likely to be
investment property;
Any other leased property of a for-profit entity is also likely to be investment
property; but
Any other leased property of a not-for-profit entity is unlikely to be
investment property.
3.3.3 Additional AASB 140 guidance on fair value
“Fair value” in AASB 140 is defined consistently with AASB 116. Therefore,
much of the discussion regarding land and buildings in Section 3.1 and 3.2 is
also relevant to investment property. However, AASB 140 provides specific
additional guidance regarding fair value measurement of investment properties,
in the following key areas:





The fair value of investment property must reflect market conditions at the
reporting date (AASB 140, para 38). This implies that, for investment
property, fair value must be determined at each reporting date, where
market conditions have changed.
Fair value specifically excludes an estimated price inflated or deflated by
special terms or circumstances (AASB 140, para 36).
The willing seller is motivated to sell the investment property at market terms
for the best price obtainable (AASB 140, para 43). The willing seller is
neither an over-eager nor a forced seller.
The best evidence of fair value is given by current prices in an active market
for similar property in the same location and condition and subject to similar
lease and other contracts (AASB 140, para 45).
In the absence of current prices in an active market for similar property (as
above), an entity must consider information from a variety of sources,
including:
 Current prices in an active market for properties of different nature,
condition or location, adjusted to reflect those differences.
 Recent prices of similar properties in less active markets, with
adjustments to reflect any changes in economic conditions.
 Discounted cash flow projections based on reliable estimates of future
cash flows, supported by the terms of any existing lease and by external
evidence such as current market rentals
(AASB 140, para 46)
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The various sources of evidence listed in the previous dot points may
provide different estimates of fair value. An entity must consider the
reasons for those differences to arrive at the most reliable estimate of
fair value within a range of reasonable fair value estimates (AASB 140,
para 47).
The above dot points are similar to the discussion in sections 2.3.1 and 2.3.2.
Fair value under AASB 140 is also consistent with the AASB 116 decision tree.
However, the main difference in the valuation of investment property compared
to property, plant and equipment, is that investment property tends to be nonspecialised. As a result, market evidence is normally available for investment
property (including market rentals).
As discussed in section 3.2.1 on non-specialised buildings, the use of current
market rentals is an application of an income approach. As this uses marketbased evidence, it is permitted by this Policy (refer section 2.3.5).
In the absence of current prices in an active market, the Standard requires the
entity to consider information from a variety of sources (e.g. discounted cash
flow projections) (AASB 140, par 46). The Standard includes a rebuttable
presumption that fair value of an investment property can be determined.
Fair value will be unavailable only in exceptional circumstances (AASB 140,
para 53).
3.3.4 Property leased to other entities in the group
AASB 140 clarifies that where an entity owns property that is leased to other
entities within the economic group, from the entity’s perspective, it is an
investment property if it meets the definition (AASB 140, para 15). On
consolidation, however, the property is owner-occupied and therefore would not
qualify as an investment property but would be valued as property, plant and
equipment under AASB 116.
3.3.5 Property interests held by a lessee under an operating
lease
In accordance with AASB 140, this Policy mandates that a property interest held
by a lessee under an operating lease must be classified and accounted for as
investment property, if it otherwise meets the definition of an investment
property (AASB 140, para 6). This Policy mandates that the lessee must use
the fair value model for this type of property, consistent with section 3.3.1 above
(AASB 140, para 6). Prior to the adoption of AEIFRS, such operating lease
payments were accounted for as an expense over the lease term based on the
pattern of benefits.
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4.
Valuation of specialised plant and
infrastructure
4.1
Introduction
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Plant and infrastructure are to be valued at fair value in accordance with AASB
116 and the additional guidance given in this Policy (refer below). The second
step of impairment testing is discussed in section 5.
In the public sector, however, there can be natural, legal, financial or sociopolitical restrictions on the use and disposal of assets. In fact, most assets in the
general government sector (the non-commercial sector of the public sector) are
held as community, cultural or heritage assets. Further, the majority of public
sector assets are held to continue to provide the services that government /
ministerial directives or legal / administrative requirements mandate the entity to
provide to the community at cost or less than cost.
Finally, in the public sector, the specialised nature of most physical non-current
assets and/or significant imperfections in the markets in which they are traded
may preclude the current market selling price from being observed. In the public
sector, specialised assets include most infrastructure assets.
For such specialised assets, fair value is measured at depreciated replacement
cost, in accordance with AASB 116. Depreciated replacement cost is a market
buying price. Because of the absence of market evidence, the income
approach option is not to be used, as outlined in section 2.3.5 (but refer section
5 for impairment testing).
Given the above circumstances in the public sector, guidance is needed to
determine depreciated replacement cost.
4.2
Valuation of specialised plant and
infrastructure
The fair value of specialised plant and infrastructure assets is measured at
depreciated replacement cost (which is not necessarily the cost of replicating
the asset) (AASB 116, para 33).
Depreciated replacement cost is the current replacement cost of an asset less
accumulated depreciation to reflect the already consumed future economic
benefits of the asset (AASB 136, para Aus6.2). Current replacement cost is
“…measured by reference to the lowest cost at which the gross future economic
benefits of that asset could currently be obtained in the normal course of
business” (AASB 136, para Aus32.2).
The Guidance Notes to the Statement of Accounting Practice SAP 1 Current
Cost Accounting (SAP 1) clarify the above definitions of replacement cost as
follows:
"For more complex depreciable assets – such as buildings or plant of
special design - the (gross) current cost of the total service potential of
the existing asset may be established…by reference to the cost per unit
of service potential of the most appropriate modern facility (replacement
cost)…” (SAP 1, Guidance Notes, para 47)
The replacement cost of the existing asset must be adjusted for any differences
between the practical capacity and / or useful life of the modern equivalent
facility and that of the existing asset (SAP 1, Guidance Notes, para 49).
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In other words, replacement cost is the minimum that it would cost, in the
normal course of business, to replace the existing asset with a technologically
modern equivalent new asset with the same economic benefits, allowing for any
differences in the quantity and quality of output and in operating costs.
The SAP 1 Guidance Notes (para 52) further states:
"In determining current cost with reference to the most appropriate
modern facility...the modern facility should be of commercially available
technology and should not require a redesign or re-engineering of an
entity's existing plant ..."
In this paper, this is termed optimised replacement cost.
The application of SAP 1 imposes three steps in determining optimised
replacement cost:
1. The replacement cost of an asset is to be determined, not by reference to
the lowest replacement cost of an identical asset, but by reference to the
lowest cost of replacing the economic benefits embodied in an existing
asset with a modern equivalent asset.
2. Second, the minimum replacement cost is to be adjusted for overdesign,
overcapacity and redundant components (termed optimisation).
3. Optimisation is limited to the extent that this can occur in the normal course
of business using commercially available technology (termed “incremental
optimisation”).
These three steps are discussed following.
4.3
The lowest cost of a modern equivalent asset
Reference to a modern equivalent asset is made to obtain a surrogate for the
current cost of the asset held. It does not imply that the reference asset will be
acquired as a replacement some time in the future (SAP 1 Guidance Notes,
para 47).
The modern equivalent asset may have a different capacity, quality,
configuration or useful life from the existing asset to be valued. In such cases
the replacement cost of the modern equivalent asset is to be pro-rated to the
economic benefits of the existing asset which should not exceed the anticipated
needs as realistically determined by the entity, termed ‘expected capacity in
use’.
‘Expected capacity in use’ is the required level of economic benefits or output
consistent with both the anticipated future growth in demand and the objective
of minimising the whole-of-life cost of assets within an entity’s business planning
horizons. It assumes no improvement to the components of the economic
benefits of the existing asset; i.e. capacity, quality of service and useful life.
Further, current cost in SAP 1 refers to the lowest cost at which the “gross
service potential” (or economic benefits) could currently be obtained (SAP 1,
Guidance Notes, para 47-48). The carrying amount of a depreciable asset,
however, needs to reflect the remaining economic benefits of the asset. Gross
current cost, therefore, must be reduced to exclude the economic benefits
already consumed or expired.
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Adjustment for overdesign, overcapacity and
redundant assets
Where assets are overdesigned, have excess capacity, or are redundant, this
should be identified by the entity and an adjustment made so that the resulting
valuation reflects the cost of replacing the existing economic benefits based on
an efficient set of modern equivalent assets to achieve the required level of
service output within the entity’s planning horizon. Spares for a particular asset
form part of the cost of that asset and are depreciated over the useful life of the
related asset.
4.4.1 Overcapacity
Overcapacity or redundant assets may be defined as assets that have a greater
service capacity than is necessary to meet the service delivery outputs within an
entity’s business planning horizon (capacity in use).
Entities would need to distinguish between temporary excess capacity and
permanent excess capacity. Temporary excess capacity refers to the situation
where a current excess capacity is required to cater for anticipated future growth
in demand.
Permanent excess capacity refers to the situation where an entity has over
invested in infrastructure assets in the past due to incorrect estimates of future
demand for its services or other changed circumstances. Permanent excess
capacity should be excluded from the asset value.
4.4.2 Redundant components
Redundant assets (e.g. of an integrated network) that are severable should be
regarded as surplus assets and valued at their market selling value. Nonseverable components which are redundant or represent overcapacity should
be excluded from the valuation. As these components cannot be disposed of, no
valuation should be assigned to them.
4.4.3 Overdesigned assets
Overdesigned assets are assets with features that are unnecessary for the
goods or services the assets provide. They are often referred to as “goldplated” assets. Measuring the economic benefits embodied based on modern
equivalent assets automatically excludes attributing any value to the
overdesigned features.
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4.4.4 Spares for plant and equipment 5
Spares for a particular asset that would become redundant if that asset were
retired or discontinued form part of the cost of that asset. As these spares can
only be used in connection with a particular asset, they do not have useful lives
of their own and therefore are depreciated over the useful life of the related
asset.
Depreciable spares, however, are distinguished from separate parts of an asset
or separate standby assets that have their own useful lives. A standby asset
may be kept as back up to an operating asset in the normal course of business
to minimise disruption to the operations when the prime assets are temporarily
out of service. They are an integral part of the operating asset and should be
valued in the same way, but they may have different useful lives and should be
separately depreciated.
Depreciable spares can also be distinguished from spares held for sale or use in
after-sales, materials, consumable stores and other supplies, which would
generally be consumed in a production process or in the rendering of services,
which are dealt with in AASB 102 Inventories.
4.4.5 Service and quality standards
The modern equivalent reference asset used normally has a higher service and
quality standard than the design standards of the existing asset. Therefore, a
pro-rata reduction will generally be necessary to reduce the gross replacement
cost of the modern equivalent asset to reflect the lower service standards of the
existing asset. This reduction is an estimate of the expenditure required to raise
the current standards of the existing asset to the higher standard of a modern
equivalent asset.
4.5
“Incremental optimisation”
Incremental optimisation refers to the optimal method of replacement of assets
in the normal course of business. This will be different from the manner in which
the existing assets were acquired or constructed, and different from ‘greenfields
optimisation’.
SAP 1 Current Cost Accounting states that, in determining current cost, it is to
be assumed that a redesign or re-engineering of the existing plant is not to
occur (SAP 1, Guidance Notes, para 52). This "incremental optimisation" allows
progressive or incremental optimisation to the extent that it occurs in the normal
course of business, including large scale replacements that may normally occur
in the planning horizons of entities.
The incremental optimisation approach recognises that there is always some
degree of suboptimality and allowance for growth in future demand, and it
reflects the historical development of the existing business, the time lag in asset
planning and construction, the very long lives of the assets, and the
replacement of their components in the normal course of business. As asset
systems expand and change, a degree of suboptimality at any point of time is
inevitable and is part of the total cost of output.
5
The guidance in this section regarding spares effectively incorporates into this Policy the
withdrawn Australian Guidance (paras G9 - G11) provided to AASB 116.
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Incremental optimisation therefore places a constraint on the extent of
optimisation. It does not allow a valuation based on optimal replacement of an
entity's entire asset network. This latter approach is termed "greenfields
optimisation". Greenfields optimisation involves determining the replacement
cost of assets based on what is the most cost-effective (or optimal) set of assets
to achieve the required level of economic benefits (in terms of capacity, service
quality and useful life). Greenfields optimisation assumes the design of an
entirely new optimal network of assets for the entity.
In practice, a greenfields replacement cannot occur in the normal course of
business (except in rare circumstances). A greenfields replacement would
rarely be feasible, given the constraints imposed by the existing network and
customer access to services. For example, in the electricity distribution
industry, these constraints include the given positions of points of supply and
customers. Similarly, in the road and rail industries, the existing transport
network means that greenfields optimisation is not feasible for the majority of
the network.
5.
Impairment testing of cash-generating units
5.1
Introduction
After fair value measurement under AASB 116, the second step is impairment
testing under AASB 136. However, AASB 136 does not apply to investment
property under AASB 140.
AASB 136 requires an entity to assess at each reporting date whether there is
any indication that an asset or cash-generating unit may be impaired. If such an
indication exists, the entity must estimate the recoverable amount (AASB 136,
para 9). Recoverable amount is defined as the higher of fair value less costs to
sell and value in use (AASB 136, para 6). An impairment loss is recognised
where the carrying amount of the asset or cash-generating unit exceeds the
recoverable amount (AASB 136, para 59).
The recoverable amount test is based on the premise that an asset or cashgenerating unit should not exceed the higher of its market-based valuation (fair
value less costs to sell) and the entity specific valuation based on expected
future cash flows (value in use). While fair value in AASB 136 is defined
consistently with AASB 116, its application is more limited than AASB 116. As
discussed in section 2.4.1 of the Policy, “fair value less costs to sell” in AASB
136 is restricted to the net market selling price. This means that for specialised
assets, in the absence of a market selling price, the recoverable amount in
AASB 136 will be the “value in use”. Therefore, this means that specialised
assets that form part of a cash-generating unit must be written down where the
value in use of the unit, based on the expected future cash flows (per AASB
136), is lower than the total of the fair value of the assets, which for specialised
assets will be based on depreciated replacement cost (per AASB 116 and
section 2.3.5 of the Policy).
Further, according to AASB 136 the recoverable amount must be estimated for
the individual asset or, if not possible, the cash-generating unit. The cashgenerating unit is defined in AASB 136 as:
“…the smallest identifiable group of assets that generates cash inflows
that are largely independent of the cash inflows from other assets or
groups of assets” (AASB 136, para 6).
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This Policy clarifies (section 2.4.2) that any reference to a cash-generating unit
also includes reference to an individual asset that constitutes a cash-generating
unit in itself.
As not all assets in the public sector are held primarily for profit generation, the
AASB has modified the definition of value in use for not-for-profit entities, as
follows:
“…in respect of not-for-profit entities, value in use is depreciated
replacement cost of an asset when the future economic benefits of the
asset are not primarily dependent on the asset’s ability to generate net
cash inflows and where the entity would, if deprived of the asset,
replace its future economic benefits” (AASB 136, para Aus6.1).
Because not explicit in the Standard, section 2.4.3 of this Policy concludes that
the practical effect of the above paragraph is to exclude these assets from the
definition of a cash-generating unit.
Stated another way, this modifies the definition of a cash-generating unit to:
“…the smallest identifiable group of assets comprising those assets
that are primarily dependent on the assets’ ability to generate cash
inflows that are largely independent of the cash inflows from other
assets or groups of assets” (AASB 136, para 6) (added Treasury words
identified in bold)
In summary, section 2.4.3 clarifies that where an asset does not constitute or
does not form part of a cash-generating unit, it cannot be impaired under AASB
136, unless selling costs are material. In NSW Treasury’s view, in most cases
selling costs will not be material. This means that where an asset does not
constitute or form part of a cash-generating unit, it is effectively exempted from
AASB 136 and impairment testing. This is because there is no material dollar
impact.
Additional guidance, however, is needed to identify when assets form part of a
cash-generating unit, that is, when assets are primarily dependent on
generating net cash inflows. Therefore, the following guidance drawn from
AASB 136 is provided to assist practical implementation of this clarified
definition:
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Identifying impaired assets;
What constitutes a cash-generating operation;
Classifying for-profit / not-for-profit entities;
Whether an entity can have both cash-generating units and other assets;
Determining the net cash inflows of a cash-generating unit;
Discounting future cash flows;
Other guidance.
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Identifying impaired assets
AASB 136 requires an entity to assess at each reporting date whether there is
any indication that an asset (or cash-generating unit) may be impaired (or that
an impairment has reversed) (AASB 136, paras 9 and 110). It lists a minimum of
external and internal indicators that must be considered (AASB 136, para 12).
External indicators of impairment include (AASB 136, para 12(a)-(d)):

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An asset’s market value has declined significantly more than expected;
Adverse events in the technological, market, economic or legal environment;
Market interest rate increases that are likely to affect an asset’s value in use;
Net assets of the entity exceed its market capitalisation.
Internal indicators of impairment include (AASB 136, para 12(e)-(g)):



Obsolescence or physical damage of an asset;
Adverse changes in the expected use of an asset, including plans for
restructuring;
Less than expected economic performance of an asset.
If (but only if) any such indication exists, an entity must estimate the recoverable
amount of the asset (AASB 136, para 9).
5.3
Guidance on what constitutes a cashgenerating unit
AASB 136 provides guidance on identifying the cash-generating unit to which an
asset belongs in assessing impairment (AASB 136, paras 66-73). AASB 136
notes that, to identify an asset’s cash-generating unit involves judgement (AASB
136, para 68). In making that judgement:
“…an entity considers various factors including how management
monitors the entity’s operations (such as by product lines, businesses,
individual locations, districts or regional areas) or how management
makes decisions about continuing or disposing of the entity’s assets
and operations” (AASB 136, para 69).
Therefore the Standard specifies different levels of aggregation at which
impairment is assessed (i.e. different to the ‘class of non-current assets’ which
was used in the previous AASB 1010). AASB 136 provides various other
examples to illustrate the principles in the above-mentioned paragraphs (refer
AASB 136, paras 67-68 and Illustrative Example 1).
For example, a cash-generating unit also includes a group of assets for which
an active market exists even if some of the output is used internally (AASB 136,
para 70).
Further, AASB 136, para 68 gives an example of a bus service, where the entity
does not have the option under its contract to curtail any individual route or
routes. Based on this, the cash-generating unit for each route is the entity as a
whole. Other illustrative examples of the above (that are not part of the
Standard) are provided after the Appendix to the Standard.
Analogously, many public sector infrastructure assets, such as those of a water
and sewerage authority or an electricity distributor, are of a highly specialised
nature. In these instances, due to the highly interdependent nature of the
assets, the cash-generating unit may be the entire business. For a water and
sewerage authority, it may or may not be possible to split the business between
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water distribution, sewerage treatment and drainage, but, even if possible, it
may be difficult to identify any smaller identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows from other assets
or groups of assets.
5.4
For-profit / not-for-profit entity classification
AASB 136 defines a not-for-profit entity as “an entity whose principal objective is
not the generation of profit” (AASB 136, para Aus6.2). By implication, a forprofit entity is an entity whose principal objective is the generation of profit.
Section 2.4.3 of this Policy clarifies that all assets of a for-profit entity form part
of one or more cash-generating units.
In the public sector, many entities are gradually moving towards becoming fully
commercial, that is, to a position where their primary objective is the generation
of profits. There are many such entities in a ‘transitional phase’ and as such, in
NSW Treasury’s view, these transitional entities are considered not-for-profit
entities. In this phase, there are number of factors, including the socio-political
environment and / or legislative requirements that may prevent the generation of
profit from being their principal objective.
Because of this, not-for-profit entities will have property, plant and equipment
that do not comprise a cash-generating unit because the future economic
benefits comprising those assets are not primarily dependent on the assets’
ability to generate net cash inflows from continuing use.
Classification as a not-for-profit or for-profit entity is addressed in a separate
Treasury Policy Paper (TPP 05-4), that requires consideration of a number of
factors, such as:
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Statements by owners about the objectives of the entity, such as statements
contained in legislation, regulations, entity constitutions and shareholder
resolutions;
Governance framework applied to the entity; i.e. the corporate structure
adopted and the formal relationship with owners;
Purpose, nature and extent of funding from owners, focusing on the extent
to which ongoing budget support is provided to an entity;
Targeted financial performance of the entity, as agreed between owners
and the board / management, focusing on the extent to which the entity
funds its expenses, maintains its asset base and provide returns to owners;
and
Classification of the entity under Government Finance Statistics (GFS).
The fact that an entity is classified as “not-for-profit” under AEIFRS does not
imply that it is not required to operate efficiently, or in a commercial manner, as
set out by its governance framework. Such a classification does not override
legal requirements; e.g. a requirement to pay dividends to owners. Similarly,
the fact that an entity is classified as “for-profit” does not mean it is released
from wider obligations to society imposed by owners or other external parties.
Classification as a for-profit or not-for-profit entity is based on a substance over
form approach and involves the exercise of professional skill and judgement.
NSW Treasury does not believe that any single factor can conclusively
determine the status of an entity. The above factors, when considered together,
will assist in the application of professional judgment to the task of identifying an
entity’s principal objective.
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These factors are discussed in more detail in a separate Treasury Policy Paper
(TPP 05-4), which provides guidance on distinguishing for-profit from not-forprofit entities. Agencies should refer to TPP 05-4 to determine their status as a
for-profit or not-for profit entity.
5.5
Whether an entity can have cash-generating
units and other assets
Practitioners in the public sector are accustomed to the distinction between a
not-for-profit entity and a profit-generating entity (in AASB 1010). Now, valuing
assets under AASB 136 will be based on whether they belong to a cashgenerating unit based on this Policy’s clarified definition. Therefore, the
question arises as to whether an entity can have both cash-generating units and
other assets.
5.5.1 For-profit entity
Prior to the adoption of AEIFRS, AASB 1010 made it clear that specialised
assets of a profit-seeking entity used to provide goods or services at no charge
or at less than the full cost recovery (i.e. “community service obligations”) must
be included in the group of assets that is dependent on the provision of those
goods or services to enable it to generate net cash inflows (AASB 1010 para
5.3). From this, under AASB 1010, a profit-generating entity could not have
assets that were not part of a cash-generating unit.
This conclusion is explicitly supported by ED 109’s ‘Request for Comment’ (the
precursor to AASB 136). ED 109 asked for comment on the proposal that “the
concept of cash-generating units removes the need to explicitly provide
guidance on calculating the recoverable amount of assets subject to community
service obligations”. Implicit in this is the view that community service obligation
assets are part of a cash-generating unit and therefore are not independent
cash flows.
Under AASB 136, the above treatment is also implicit. Further, it is consistent
with the treatment of corporate assets in AASB 136. Corporate assets such as
building headquarters do not generate separate cash inflows. AASB 136 makes
it clear that such assets belong to a cash-generating unit (AASB 136, para 101)
and that, where there are any indicators of impairment, the recoverable amount
is determined for the cash-generating unit to which the corporate assets belong.
5.5.2 Not-for-profit entity
AASB 136 defines a not-for profit entity as an entity whose principal objective is
not the generation of profit (AASB 136, para Aus6.2). Further, it explicitly states
that, where the assets of a not-for-profit entity are not primarily dependent on
the generation of net cash flows, value in use shall be determined as the
depreciated replacement cost of the asset.
In effect, as discussed in section 2.4.3, these types of assets are excluded from
the definition of a cash-generating unit and from impairment testing, unless
selling costs are material. Notwithstanding this, a not-for-profit entity can have
cash-generating units. This means that a not-for-profit entity may include noncash-generating assets as well as a cash-generating unit/s.
A “unit” of a not-for-profit entity that has a number of objectives, but where
generating profit is not the primary objective, is excluded from the definition of a
cash-generating unit. The distinction between a for-profit and not-for-profit
entity discussed in section 5.4 is also relevant to the distinction between a cashgenerating and non-cash-generating unit of a not-for-profit entity.
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5.6
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Determining the net cash inflows of a cashgenerating unit
5.6.1 Elements of value in use
AASB 136 requires that the following elements must be reflected in the
calculation of a cash-generating unit’s value in use (AASB 136, para 30):
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Estimate of future cash flows the entity expects to derive from the cashgenerating unit;
Expectations about possible variations in future cash flows*;
The current market risk-free rate of interest;
The risks specific to the asset (or price for bearing the uncertainty inherent in
the asset)*; and
Other factors that market participants would reflect in pricing the future cash
flows*.
The asterisked elements above can be reflected either as adjustments to future
cash flows or as adjustments to the discount rate (AASB 136, para 32).
Appendix A to AASB 136 (which is part of the Standard) provides additional
guidance on the use of present value techniques in measuring value in use.
5.6.2 Basis of estimates for value in use cash-flows
AASB 136 provides extensive guidance regarding the basis for the estimates of
future cash flows (AASB 136, para 33-38), including what these estimates
should include and exclude (AASB 136, paras 39-53). This guidance is briefly
summarised below:
Estimates of future cash flows must be based on:

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
Management’s best estimates of the range of economic conditions that will
exist over the remaining useful life of the asset (giving greater weight to
external evidence) (AASB 136, para 33(a));
Most recent budgets approved by management (for a maximum period of
five years unless longer is justified) (AASB 136, para 33(b)); and
Most recent budgets extrapolated using a steady or declining growth rate
(unless an increasing rate can be justified but not to exceed the long-term
average growth rate for the products et al) (AASB 136, para 33(c)).
Future cash flows must be estimates for an asset based on its continued use
(AASB 136, paras 39-43) and in its current condition (AASB 136, para 44-49).

This includes:
 Cash flows for the day-to-day servicing of the asset as well as directly
attributable future overheads (AASB 136, para 41);
 Cash flows from a committed restructuring (AASB 136, para 47);
 Future cash flows to maintain the level of economic benefits expected to
arise from an asset in its current condition (AASB 136, para 49);
 Net cash flows, if any, to be received for the disposal of the asset at the
end of its useful life (AASB 136, para 39(c) and 52-53).
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Estimates of future cash flows must exclude:
 Cash inflows from assets that generate cash inflows largely
independent of the cash inflows from the asset under review (e.g.
receivables) (AASB 136, para 43(a));
 Cash outflows that relate to obligations that have been recognised as
liabilities (e.g. provisions or payables) (AASB 136, para 43(b));
 Certain cash flows or related cash flow savings from a future
restructuring that an entity is not yet committed to or improving or
enhancing an asset’s performance (AASB 136, para 44); and
 Cash flows from financing or tax (AASB 136, para 50).
When a cash-generating unit consists of assets with different estimated useful
lives, all of which are essential to the ongoing operation of the unit, the
replacement of assets with shorter lives is considered to be part of the day-today servicing of the unit when estimating the future cash flows associated with
the unit. Similarly, when a single asset consists of components with different
estimated useful lives, the replacement of components with shorter lives is
considered to be part of the day-to-day servicing of the asset when estimating
the future cash flows generated by the asset (AASB 136, para 49).
Where management expectations are relied on, it is appropriate that these
estimates be supported by a due diligence review by external consultants.
5.7
Discounting future cash flows
AASB 136 requires the future cash flows of a cash-generating unit to be
discounted using a pre-tax rate that reflects current market assessments of the
time value of money and risks specific to the asset for which the future cash flow
estimates have not been adjusted (AASB 136, para 55).
AASB 136 paragraphs 56 to 57 and Appendix A to the Standard provide
additional guidance.
Consistent with that guidance, this Policy requires the discount rate to be based
on the weighted average cost of capital (WACC) of the operation determined
under the Capital Asset Pricing Model (CAPM).
Additional guidance on WACC is provided in Appendix F.
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Other guidance
AASB 136 includes extensive guidance in other areas on determining and
accounting for the impairment loss for cash-generating units and goodwill. For
example:
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How the concept of materiality applies in identifying whether the recoverable
amount of an asset needs to be estimated (AASB 136, para 15). If previous
calculations show an asset’s recoverable amount is significantly greater
than the carrying amount, it need not be re-estimated if no events have
occurred that would eliminate that difference.
How to allocate goodwill to cash-generating units (AASB 136, paras 80-87).
This involves both a ‘bottom up’ and ‘top down’ test.
How to allocate corporate assets to cash-generating units (AASB 136, paras
100-103).
How to calculate the recoverable amount of a cash-generating unit where
the owner has a restoration liability (by eliminating the restoration liability
from both the carrying amount of the asset and the cash flows) (AASB 136,
paras 39-43 and 78).
How to allocate the impairment loss (AASB 136, para 104-108). For a cashgenerating unit any impairment loss must be allocated to reduce the
carrying amount of the assets of the unit in the following order:
 first, to reduce the carrying amount of any goodwill allocated to the
cash-generating unit; and
 then, to the other assets of the unit pro rata on the basis of the carrying
amount of each asset in the unit.
However, in allocating an impairment loss, an entity must not reduce the
carrying amount of an asset below the highest of its fair value less costs to
sell; value in use (if determinable); and zero.
When an impairment loss is to be reversed (AASB 136, para 109-125). An
entity must assess whether there is any indication that an impairment loss
previously recognised no longer exists or has decreased, considering
external and internal sources of information.
How to recognise an impairment loss (AASB 136, paras 59-60). An
impairment loss is recognised in the income statement, where the carrying
amount of the asset or cash-generating unit exceeds the recoverable
amount (AASB 136, para 59). However, impairment of an asset recognised
at a revalued amount is treated as a revaluation decrement (AASB 136,
para 60).
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6.
Heritage / cultural assets
6.1
Introduction
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Heritage / cultural assets are assets held by entities because of their unique
cultural, historical, geographical, scientific and / or environmental attributes.
They assist the relevant entities in meeting their objectives in regard to
exhibition, education, research and preservation, all of which are directed at
providing a cultural service to the community.
Some heritage assets are solely of a historical or cultural interest (for example,
monuments and statues) while others also provide a functional service (for
example, heritage buildings used as commercial offices).
Heritage assets are to be valued at fair value in accordance with AASB 116 and
the additional guidance in this Policy. Where such assets are held by not-forprofit entities, by their nature it is unlikely that they are held primarily for profit
generation, unless they are part of a larger cash-generating unit. Therefore,
most heritage assets are effectively exempt from AASB 136 and impairment
testing. This is because there is no material dollar impact.
Where heritage assets are held by for-profit entities they will form part of a cashgenerating unit subject to impairment testing (refer Section 5 of the Policy).
Fair value must be determined having regard to the “highest and best use” for
which market participants would be prepared to pay (section 2.3.1). However, a
characteristic of many cultural / heritage assets is that they have few or no
alternative uses because there are natural, legal, financial or socio-political
restrictions on their use and disposal, as discussed in section 2.3.1. Therefore,
for many heritage / cultural assets, fair value means “existing use” value.
Fair value is determined by reference to the best available market evidence.
Where available, this should be based on the current market selling price for the
same or a similar type of asset (for example, for works of art). Many types of
heritage assets are of a specialised nature (or unique) for which no market
selling price can be observed or for which no relevant market exists. The
treatment of specialised assets is discussed in section 2.3 and section 2.4 of
this Policy and in AASB 116, para 33.
For example, a majority of the items within a natural history collection may not
have an available market value. These include collections from arachnology,
botany, crustacea, entomology, geology, herpetology, ichthyology, invertebrate
zoology, mammalogy and ornithology.
In these circumstances, the asset’s fair value is measured at its depreciated
replacement cost, in accordance with AASB 116. Because of the absence of
market evidence, the income approach is not to be used, as outlined in section
2.3.5.
There will be instances where heritage / cultural assets are not capable of
reliable measurement and will not be recognised. This occurs where there is no
market selling price and where a replacement cost is not available, or cannot be
reliably measured, due to the unique nature of the asset.
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Reliable measurement may be difficult for certain groups of items including:

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Unique items that have iconic status (e.g. a landing board used at Gallipoli,
an original Eureka flag etc);
Historic library and museum collections; and
Items that are sacred to particular communities.
A decision not to recognise certain heritage assets in the financial statements
because of the inability to obtain a reliable value normally would need to be
supported by an external opinion given by an expert in that particular area.
Where heritage assets are not recognised in the financial statements, relevant
information on those items should be disclosed in the notes to the financial
statements, as outlined in Section 7.7.
6.2
Library/museum collections and works of art
Library/museum collections and works of art generally have no feasible
alternative use and should be valued based on “existing use”.
Artworks, furniture, jewellery, book collections (historic and current), philately
and coin collections can usually be valued reliably based on market selling
value because of the existence of sufficiently deep markets and the availability
of expert valuers. Other collections, including archival, technology, and fashion
and design collections may have very thin markets and valid sampling
techniques may be difficult to establish.
Given the specialised unique nature of these other types of heritage / cultural
assets, the best available market evidence of fair value may be the replacement
cost, consistent with Section 2.3.5. This Policy provides that the replacement
cost will be based on the lower of the current replacement cost and the current
reproduction cost of the asset.
For specimens, the only available indicator of fair value may be the reproduction
cost. The cost of mounting an expedition or field trip to collect similar
replacement specimens, together with the costs associated with their
documentation and preparation, represent their reproduction cost.
In determining the replacement cost of a heritage / cultural asset, it is important
to consider the function / purpose of the asset. It may be possible to replace the
function of an asset, not with an identical asset, but with another type of asset.
Therefore the absence of an active secondary market for a particular type of
asset does not necessarily mean that the asset cannot be measured reliably.
For instance, an asset may represent a certain school of art or the clothes of a
particular historical person. It may be possible to replace the function that a
unique item performs by the acquisition of another painting of that school or
some other possessions of the historical character.
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However, if the painting was held because it was by a particular artist, or
because the clothes had been worn by a famous fashion model, or the film had
been collected because it was the work of a particular producer, the
replacement items used as a reference for valuation must relate to those
specific persons.
Further, for specimens, it may be that the function is more readily replaced
where the specimens are intended for display rather than scientific purposes. If
the function is to provide a scientific specimen representative of the location and
time at which the specimen was collected, it may not be possible to replace the
function of the assets. Alterations to habitat and extinction of species can make
it impossible to replace many specimens.
It is important, therefore, for the collection managers to decide on the form or
manner in which an asset would be replaced (where possible), having regard to
its function, and to advise the valuer accordingly.
Exhibits comprising general items of technology (without any specific intrinsic
characteristics) that are used to illustrate a technical process or product could
be valued at either their replacement or reproduction cost, depending on the
manner in which replacement would be undertaken.
In some cases, however, the function of library and museum collections may not
be capable of reliable measurement because its function cannot be replaced (eg
State archives / records) or it may not be feasible to obtain a replacement or
reproduction cost given the nature of the asset (e.g. certain scientific specimen
collections).
The valuation of library / museum collections and works of art may also involve
the use of sampling techniques by professional statisticians. This is further
discussed in Appendix G.
6.3
Heritage properties
Heritage buildings are to be valued at fair value, having regard to the highest
and best use of the asset. As there are few or no alternative uses for such
properties, they are generally valued based on “existing use”.
There are exceptions to this - where a heritage building may be available for a
feasible alternative use.
For example, it may be feasible that a fire station situated in a heritage building
could be relocated and the heritage building used for commercial purposes.
Where this is a feasible alternative within the existing socio-political
environment, then the building must be valued based on highest and best use,
which, for example, may be as a commercial building.
The fair value of heritage buildings is determined by reference to the best
available market evidence. Where the building has a feasible alternative use, it
may be possible to obtain a market selling price for the building as say a
commercial building or the current market price may be derived from current
market rentals, as discussed in sections 2.3.2 and 3.2 of this Policy.
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Where the building has few or no feasible alternative uses, this may be more
difficult. In particular, where the building is unique (or specialised), generally
there is no observable current market selling price. For example, there are no
current market selling prices available to value Parliament House or the Mitchell
Library building. The best available market evidence for unique (or specialised)
heritage buildings is the replacement cost of the remaining economic benefits,
consistent with section 2.3.5. The remaining economic benefits reflect the
current condition of the building.
In determining the replacement cost for heritage buildings, heritage buildings
often have both functional as well as heritage characteristics. But, where such
buildings are held because of their heritage significance, and the heritage
uniqueness cannot be replaced with a modern building (replacement cost),
current cost means the cost of replicating the existing asset. This is because the
replication cost reflects the valuation of the heritage value or quality embodied in
the asset.
Replication (reproduction cost) would assume reconstruction with modern
materials, but sympathetic with the original heritage design and structure, to the
extent that this is feasible. If a heritage building was a prestige construction with
an imposing entry, high ceilings, elaborate sandstone carvings, open verandas
and large carved cedar doors, the cost of replication would reflect that design
and structure.
For example, it may not be feasible to replicate cedar doors built from 1,000
year-old cedar trees sourced from the Dorrigo Mountains. Instead, replication
would assume sympathetic replication with similar materials. The cedar doors
could be reconstructed using other available cedar. Similarly, modern
construction might include concrete with sandstone façade in place of metre
thick sandstone blocks.
Although the functional benefits of the building could be replicated with a
contemporary building, the above sympathetic replication does not imply that
the building is overvalued. Instead, the valuation accurately reflects the heritage
value at current replacement/replication cost.
There may be other cases where it is difficult to reliably measure the heritage
features of a building that has both functional and heritage features. In these
cases, additional information on the heritage features and the annual
maintenance/preservation costs should be included in the notes to the financial
statements (see Section 7.7).
In other cases, it may be determined that a building has no or little heritage
value. In these cases, the replacement cost would assume the existing building
would be replaced by a modern building and valued at the replacement cost of
the economic (functional) benefits only.
Land under heritage buildings and investment properties is to be valued in
accordance with Section 3.
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7.
Other valuation issues
7.1
Separate restatement of gross amount and
accumulated depreciation
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AASB 116 para 35 states that when an item of property, plant and equipment is
revalued, any accumulated depreciation must be treated in either of the
following ways:
“(a) Restated proportionately with the change in the gross carrying
amount of the asset so that the carrying amount of the asset after
revaluation equals its revalued amount. This method is often
used when an asset is revalued by means of applying an index to
its depreciated replacement cost; or
(b) Eliminated against the gross carrying amount of the asset and the
net amount restated to the revalued amount of the asset. This
method is often used for buildings.”
This Policy mandates the method in para (a) above, where an entity revalues
depreciable assets by reference to current prices for assets newer than those
being revalued, and adjusts those amounts to reflect the present condition of the
asset. Para (a) requires the separate restatement of the gross amounts and
accumulated depreciation. This is consistent with the option provided in the
previous AASB 1041. Therefore, gross restatement is typically required for
specialised assets where valuation using replacement cost is required under
AASB 116 and in accordance with this Policy. For non-specialised assets
where market-based evidence is available the method in para (b) should be
adopted.
The treatment in para (a) is mandated because, in the circumstances noted, the
gross amount of current values of new assets and the accumulated depreciation
are both considered to be relevant information, as most public sector
infrastructure assets are specialised assets, with no feasible alternative uses.
To continue to provide the services that the government mandates, such entities
must replace the existing service potential embodied in the assets. This is
further discussed in section 2.3.5 of the Policy.
Further, the gross restatement method in para (a) above is mandated
irrespective of whether a revaluation has been conducted in that particular year
and irrespective of whether the class or cash-generating unit has been written
down to recoverable amount.
Finally, where there has been a write down to recoverable amount, this Policy
requires that entities must separately disclose for each class of property, plant
and equipment, the:





Gross replacement cost;
Accumulated depreciation;
Depreciated replacement cost;
Accumulated impairment losses; and
Recoverable amount.
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Where an asset is written down to recoverable amount, the accumulated
depreciation disclosed above must still be based on the gross replacement cost,
for disclosure purposes i.e. as Treasury has mandated the gross restatement
method.
Notwithstanding this, where there has been a recoverable amount write-down,
the depreciation expense recognised in the Operating Statement in future
periods must be based on the recoverable amount (i.e. rather than the gross
replacement cost), in accordance with AASB 136, para 63.
Other disclosures regarding impairment losses are specified in AASB 136 paras
126 to 133.
7.2
Asset revaluation reserve on disposal
AASB 116 provides that an Asset Revaluation Reserve may be transferred
directly to Accumulated Funds either when the asset is derecognised or
progressively as the asset is used (AASB 116, para 41). This Policy requires
that this transfer is only made when the asset is derecognised. The timing for
this transfer is appropriate because the revaluation increment has been realised
on derecognition.
7.3
Asset revaluation reserve – unit of measure
AASB 116 does not prescribe the unit of measure for recognising assets, that is,
what constitutes an item of property, plant and equipment (AASB 116, para 9).
This is relevant to for-profit entities, because revaluation increments and
decrements must be offset on an individual asset basis (AASB 116, para 39).
Prior to the adoption of AEIFRS, under AASB 1041, revaluation increments and
decrements were offset on a class basis for all entities. Under AASB 116, the
requirement to offset on a class basis is only retained for not-for-profit entities.
According to AASB 116, for for-profit entities, an “asset”, not a “part of an asset”,
is the basis for accounting for the movement in the asset revaluation reserve.
This means that asset revaluation increments and decrements relating to parts
of a complex infrastructure asset (e.g. electricity power station) may be offset.
Notwithstanding this, the Standard requires that where major parts of an asset
have useful lives materially different from the asset and therefore require
replacement during the life of the asset, each part is depreciated over its shorter
useful life (AASB 116, para 44 and para 45).
For valuation purposes, professional judgement is required in determining the
unit of measure for an entity’s specific circumstances. For-profit entities should
consider the following issues:

How the business is managed. This may be evidenced by:




How management assesses and monitors performance.
Whether the business is managed on an individual, functional,
geographical or total entity basis. Supporting documents include
strategies in respect of service delivery, capital expenditure, asset
management and risk management.
Whether the business is managed on the basis of a cash-generating
unit.
The regulatory approach adopted by national and state jurisdictional
regulators in respect of the entity’s economic and operational activities.
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What is an operating asset:


Whether an item has utility by itself or only when operating in
conjunction with other items of property, plant and equipment – that is,
whether the components work together as an integrated whole to
provide a service or bundle of related services to the end customer and
deliver future economic benefit.
What items of property, plant and equipment would be aggregated to
constitute an asset for the purposes of disposal as evidenced by
observable market transactions.
For example, a water corporation’s rationale for the unit of measure at the
complex asset level may be based on the integrated functionality of individual
components. That is, reservoirs, treatment/filtration plants and pumping stations
of a water corporation may contribute towards a complete delivered water
service to customers. The case for one complex asset may also be evidenced
by an integrated water delivery system where water may be sourced from
multiple reservoirs should there be supply or water quality issues in one
particular part of the system. A water entity may have three assets – the above
mentioned water delivery asset, as well as sewerage and drainage assets.
An electricity Distribution Network Service Provider may only have one complex
infrastructure asset based on an analysis of the above principles, including that
all components within the network must work together in order to reliably supply
electricity to the end customer.
7.4
Restoration / remediation costs
Fair value should take into account the current condition of an asset, including
the impact of any contamination or environmental damage. The best evidence
of fair value is given by “current prices…for similar property in the same location
and condition….” (AASB 140, para 45) (italics added). Therefore fair value
reflects the un-remediated condition.
Where there is a legal or constructive obligation recognised for remediation or
restoration costs under AASB 137 Provisions, Contingent Liabilities and
Contingent Assets, entities must recognise the related asset at fair value plus
the remediation costs (AASB 116, para 16(c)).
Nevertheless, the current condition of the asset, in its un-remediated state, is
measured by:



Obtaining the un-remediated fair value;
Adding the remediation costs net of depreciation; and
Deducting the related remediation liability (to avoid double counting).
The net valuation is the same under both situations (i.e. where there is and is
not a remediation liability), only the mechanics and (gross) recognised amounts
differ. That is, where there is an obligation for remediation, the current condition
of the asset is reflected net of the related remediation liability; while where there
is no related liability, the condition of the asset is reflected in the fair value of the
asset.
The two scenarios where a remediation liability is and is not recognised are
further discussed below and as part of Treasury’s Guidelines for Capitalisation
of Expenditure (TPP 06-6).
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7.4.1 Remediation costs where there is a legal or constructive
obligation
AASB 116 states that the cost of an item of property, plant and equipment
includes the initial estimate for dismantling, removing and restoring an asset,
arising from both (AASB 116, para 16(c)):


An obligation incurred as a consequence of installing the item; or
An obligation incurred as a consequence of using the item during a
particular period.
In other words, if a restoration provision is recognised in accordance with AASB
137, it should be accompanied by the capitalisation (and depreciation) of the
restoration cost (AASB 116, para 16(c)). IAS 16 Basis for Conclusions para BC
16 notes that the above applies whether assets are measured at cost or
revalued amount. Such costs must be included where restoration / remediation
costs are recognised under AASB 137. Previous Accounting Standards did not
address this issue.
AASB 137 notes that provisions include legal or constructive obligations (AASB
137, para 17). It is only those obligations arising from past events that exist
independently of an entity’s future actions that are recognised as provisions
(AASB 137, para 19-22, Appendix C, Examples 2A, 2B and 3). This may arise
as a consequence of installation or as a consequence of using an item (AASB
137, para 19, Appendix C, Example 3). Conversely, an intention to operate
differently in future is not a present obligation as there is no obligating event
(where the entity can avoid the expenditure by changing its method of
operations) e.g. intention to fit smoke filters in a factory (AASB 137, para 19 and
Appendix C, Example 6). Similarly, provisions cannot be recognised for major
periodic maintenance or overhauls as there is no present obligation (AASB 137,
Appendix C, Examples 11A and 11B).
The Standard gives the following examples of provisions for restoration /
remediation costs (AASB 137, para 19):


Penalties or clean-up costs for unlawful environmental damage;
Decommissioning costs of an oil installation or nuclear power station to the
extent the entity is obliged to rectify damage already caused.
The amounts may not be easily determined due to the long time frames
commonly involved. Another analogous example of a provision for restoration,
although not explicitly mentioned in the Standard, is a make-good provision of
leasehold premises.
Where a liability for restoration / remediation costs is recognised, it is also
important to understand the basis of the valuation of the land obtained, to avoid
double counting. Consistent with UIG Interpretation 1 Changes in Existing
Decommissioning, Restoration and Similar Liabilities (para IE7), recognition of a
liability for remediation costs affects the amount recognised for the related
asset, as follows:


Value in use - AASB 136 and UIG 1 make it clear that cash outflows
relating to obligations recognised as liabilities must be excluded from the
value in use calculation (AASB 136, para 43). This is necessary to avoid
double counting.
Depreciated replacement cost – Where a remediation liability is recognised
under AASB 137, an appropriate amount will need to be added to the
valuation of the related asset to reflect the depreciated replacement cost of
that part of the asset.
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Market selling price – Market selling price should reflect the current condition
of the asset. Therefore, where reference is made to prices for similar
assets, these must be adjusted for any differences in condition, including
potential remediation costs. Where a remediation liability is recognised
under AASB 137, to ensure that it is not counted twice, the asset must be
recognised at market selling price (fair value) based on the current condition
plus the allowance for the remediation costs.
Accounting for changes in restoration or remediation costs is further outlined in
UIG Interpretation 1. UIG 1 includes an illustrative example using the
revaluation model, including journal entries (UIG1, Illustrative Examples, paras
IE6-IE12).
7.4.2 Remediation costs where there is no legal or
constructive obligation
There may be circumstances where an entity holds an asset that is
environmentally damaged or contaminated, but where there is no legal or
constructive obligation to remediate or restore the asset. For example, a
constructive obligation does not arise unless the conduct of the entity, through
its past practices, policies or statements, has created a valid expectation on the
part of those affected that it will discharge its responsibilities and remediate the
site (AASB 137, para 10).
Where there is no legal or constructive obligation, the treatment of remediation
and restoration costs depends in part on whether existing use or highest and
best use valuation is adopted.
Existing use valuation
Where there are no feasible alternative uses, the fair value of an asset should
reflect the current condition of an asset in its existing use. Therefore, where
there has been environmental damage to an entity’s asset, this should be
reflected in its fair value.
Further, by definition, an existing use valuation does not take into account any
costs necessary to dismantle, remove and restore a site for an alternative use.
For example, lands under railway corridors are likely to have no feasible
alternative use. The existing use value may best be expressed as undeveloped
industrial or residential land discounted to allow for constraints of development
e.g. shape and size etc (refer Appendix B, section 3.2 of the Policy). Further,
where the railway corridor land is contaminated, the value of the undeveloped
industrial land must also be reduced to reflect the impact of the contamination
on its value.
The costs of removing the railway track or tunnel / cuttings are not relevant as
there is no feasible alternative use for the land.
Highest and best use (feasible alternative use) valuation
Where an asset has a feasible alternative use, fair value is measured as the
‘highest and best use’, after taking into account the costs of achieving the
feasible highest and best use alternative. Therefore, fair value is net of the
costs to achieve that use. These costs include costs for any rezoning of the
land and the costs of restoration or removal of existing improvements and / or
reparation work to restore the land to useable condition for that alternative use.
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Major inspection costs
AASB 116, para 14, provides:
“A condition of continuing to operate an item of property, plant and
equipment (e.g. an aircraft) may be performing regular major
inspections for faults regardless of whether parts of the item are
replaced. When each major inspection is performed, its cost is
recognised in the carrying amount of the item of property, plant and
equipment as a replacement if the recognition criteria are satisfied. Any
remaining carrying amount of the cost of the previous inspection (as
distinct from physical parts) is derecognised. This occurs regardless of
whether the cost of the previous inspection was identified in the
transaction in which the item was acquired or constructed. If necessary,
the estimated cost of a future similar inspection may be used as an
indication of what the cost of the existing inspection component was
when the item was acquired or constructed.”
This means that, on initial acquisition or construction, major inspection costs not
separately identified must be re-allocated as a portion of the recognised value,
rather than being added to cost or fair value of an item of property, plant and
equipment.
Further, unlike restoration or remediation costs, inspection costs do not give rise
to a liability. This is because there is no obligation to undertake the inspection
(refer also AASB 137, para 19 and Appendix C, Examples 11-11B). It is only
those obligations arising from past events that exist independently of an entity’s
future actions that are recognised as provisions.
As a result, when accounting for revalued assets with material inspection costs,
it is important to understand the basis of the valuation obtained, as follows:



Value in use – The cash outflow relating to major inspection costs should be
included as part of the value in use calculation. This is consistent with
AASB 136, para 49 which states that when a single asset consists of
components with different useful lives (e.g. the inspection component), the
replacement of components with shorter lives is considered to be part of the
day-to-day servicing of the asset and therefore is included in estimates of
the future cash flows.
Depreciated replacement cost - If an asset is valued on a depreciated
replacement cost basis, the valuation obtained may not separately identify
the inspection cost component. If it does not, an appropriate amount will
need to be re-allocated (rather than added) to the valuation to reflect the
depreciated replacement cost of that part of the asset.
Market selling price – A valuation based on market selling price is unlikely to
separately identify the inspection cost component. Therefore, an
appropriate amount will need to be re-allocated (rather than added) to the
valuation to reflect the inspection cost component.
The treatment of major inspection costs is also discussed as part of Treasury’s
Guidelines for Capitalisation of Expenditure (TPP 06-6).
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Conduct of valuations
AASB 116 does not prescribe whether valuations should be conducted by
internal or external valuers, but notes that the fair value of land and buildings is
“normally” undertaken by professionally qualified valuers (AASB 116, para 32).
AASB 140 also encourages, but does not require, the fair value of investment
property to be determined by a professionally qualified independent valuer, with
recent relevant experience (AASB 140, para 32).
This Policy allows valuations to be conducted internally or by external valuers.
The decision requires consideration of such factors as:



The expertise required to value the assets;
The availability of in-house expertise and whether it would be more
appropriate to use the staff for their core duties; and
The objectivity of in-house staff.
Depending on the valuation project, it may be appropriate for the valuations to
be managed by an independent organisation with general valuation skills.
Generally, an approach which complements the local knowledge and expertise
of in-house staff with the expertise of external valuers will be a more effective
strategy. The involvement of external valuers will help ensure the
independence of the process. Also, any decision not to recognise assets
because of the inability to obtain a reliable value (e.g. for certain heritage
assets) normally would need to be supported by an external opinion given by an
expert in that particular area.
It is important that valuers are instructed that their valuation must be made in
accordance with this Policy. It is the primary responsibility of the agency to
determine the basis for the valuation and adequately instruct the valuer. In
particular, agencies need to provide instructions to valuers in the following
areas:




Whether assets are to be valued at highest and best use or existing use
(based on feasible alternative use criteria).
Existence of any contamination / damage to property including (but not
limited to) areas where there is a legal or constructive obligation.
Timing of any major inspection costs.
Different categories of assets to be valued e.g. Heritage assets, assets held
for sale, investment property, easements etc.
Consistent with the instructions, the valuer’s report should include the following
explicit statements:



The valuation is made in accordance with AASB 116, AASB 136, AASB 140
(where relevant) and this Policy;
The methods(s) used in determining fair values for each class of assets; and
The reason for the method(s) used (for example that assets have been
valued at existing use because of the absence of feasible alternative uses).
However, it is an agency’s responsibility to review any independent valuations to
ensure they are appropriate prior to their use.
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Disclosures for assets not recognised
Entities are required to make disclosures additional to those required by
Australian Accounting Standards, where the entity holds assets that are not
recognised in the financial statements because they cannot be measured
reliably (e.g. certain heritage assets). In these cases, the following disclosures
should be made in the notes to the financial statements:



The reasons for the inability to obtain a reliable value;
The quantum, nature and functions of the assets, and their heritage
significance where applicable; and
An estimate of the annual costs of maintenance or preservation, where
applicable.
7.8
Depreciation
7.8.1 Depreciation under AASB 116
Under AASB 116, parts of assets are not separate assets for valuation purposes
(refer AASB 116, para 43 and section 7.3 of the Policy), but the Standard
requires that each part with a cost that is significant in relation to the total cost of
the item must be separately depreciated (para 43-45). Stated another way,
where major parts of an asset have useful lives materially different from the
asset and therefore require replacement during the life of the asset, each part is
depreciated over its shorter useful life. The fact that an asset is valued at fair
value and periodically revalued does not obviate this necessity because
depreciation is an allocation process over an asset’s useful life (not over the
period between revaluations). Also, the residual value, useful life and
depreciation method must be reviewed annually.
AASB 116 requires the “depreciable amount” to be depreciated because all
physical assets have a limited “useful life”. “Useful life” is the shortest of an
asset’s expected physical, technological or economic life to the entity.
“Depreciable amount” means the historical or revalued gross cost less the net
amount to be recovered on disposal at the end of its useful life.
Some assets may have an extremely long useful life (and the life may be
indeterminate or even indefinite). For example, original artworks and collections
are typically carefully preserved and restored for display or heritage reasons.
Similarly, it is the intention to preserve other heritage assets, including heritage
buildings, indefinitely. This would include iconic heritage assets such as the
Opera House and the Harbour Bridge.
In these cases, the amount of depreciation may be immaterial and/ or may not
be able to be reliably measured, because either or both the useful life or the net
amount to be recovered at the end of the useful life (and therefore the
depreciable amount) cannot be reliably measured. In these cases, depreciation
is not recognised, but the decision not to recognise depreciation must be
reviewed annually as required by AASB 116.
This line of argument does not extend to any other assets, including specialised
assets such as infrastructure. This is because such assets are complex systems
comprising separate parts that have differing useful lives that can be estimated,
these parts are replaced, and Australian Accounting Standards (including the
Australian Accounting Interpretations) both require the parts to be depreciated
and prohibit renewals accounting.
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7.8.2 Investment property
Investment property measured at fair value in accordance with AASB 140 is not
depreciated as changes in fair value are fully recognised in the income
statement each financial year.
7.9
Non-specialised assets
Non-specialised assets discussed in this section are physical non-current assets
not otherwise discussed in this Policy. Examples include motor vehicles, office
equipment and computers.
As noted above, physical non-current assets are to be valued at fair value in
accordance with Accounting Standards and the additional guidance in this
Policy. Fair value is measured at quoted market price or the best available
evidence, including current market prices for assets that are similar in use, type
and condition (similar assets) and the prices of the most recent transactions.
Where current market prices cannot be observed, fair value is measured at the
replacement cost of the asset’s remaining service potential (section 2.3.5 of this
Policy).
For non-specialised assets with short useful lives, these guidelines allow
recognition at depreciated historical cost as an acceptable surrogate for fair
value. This is because any difference between fair value and depreciation is
unlikely to be material. In other words, it equates with fair value in all material
respects. Further, the benefit of ascertaining a more accurate fair value does not
justify the additional cost of obtaining it. Finally, use of a surrogate is allowed to
avoid the necessity of obtaining market evidence to justify that the difference is
immaterial. The valuation policy would state that the assets are valued at fair
value.
7.10 Assets held for sale
7.10.1
Measurement and disclosure requirements
AASB 5 Non-current Assets Held for Sale and Discontinued Operations creates
held for sale assets as a separate class of assets and specifies different
measurement and disclosure requirements, as follows:






The assets or disposal group are measured at the lower of carrying amount
and fair value less costs to sell (AASB 5, para 15);
An impairment loss is recognised in profit or loss for any initial or
subsequent write down from the carrying amount measured immediately
before reclassification or re-measurement (AASB 5, para 18 and 20, IFRS
5, Basis for Conclusions, BC48);
The assets are not depreciated (AASB 5, para 25);
The assets and liabilities must be re-classified to current assets and
liabilities (AASB 5, para 3);
The assets and liabilities must be shown separately from other assets and
liabilities in the balance sheet (but no offsetting) (AASB 5, para 38);
The major classes of assets and liabilities must be separately disclosed
either on the face of the balance sheet or in the notes (AASB 5, para 38).
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To meet the definition of held for sale, a number of strict criteria must be
satisfied, e.g. the asset must be available for immediate sale and the sale must
be highly probable (refer AASB 5, paras 6-12).
In most circumstances, re-classification and re-measurement as an asset held
for sale will have no material effect on any previous measurement as property,
plant and equipment. This is because under this Policy, entities are already
required to recognise these assets based on fair value. Therefore, the only
difference will arise where selling costs are material. In Treasury’s view, in most
cases, selling costs will not be material.
7.10.2
Exclusions
The held for sale measurement requirements do not apply to those assets
already carried at fair value with changes in fair value recognised in profit or loss
under another standard (e.g. investment property measured at fair value) (AASB
5, para 5(d)).
AASB 5 also does not apply to administrative restructures (equity transfers)
between government departments subject to AAS 29 Financial Reporting by
Government Departments (AASB 5, para Aus2.1). Further, NSW Treasury’s
view is that other equity transfers, not subject to AAS 29 (e.g. between a
department and statutory body or between two statutory bodies), do not satisfy
the held for sale definition. Accounting for equity transfers is further addressed
in Treasury Policy TPP 06-7 Contributions by Owners made to Wholly-Owned
Public Sector Entities.
7.11 Valuation of easements
Easements must be accounted for in accordance with AASB 138 Intangible
Assets rather than AASB 116, because easements are an “interest” in land or
property that is intangible rather than tangible in nature.
Easements may be related to the existence of specialised system assets on or
under the surface of land owned by parties external to the entity. Common
examples in the public sector include transmission line and pipeline easements.
Easements generally create a right of way or right to use land only. As such,
they meet the definition of an intangible asset under AASB 138. That is, they
are “…an identifiable non-monetary asset without physical substance” (AASB
138, para 8). Easements are similar in nature to the “contract based intangible
assets” referred to in the Illustrative Examples provided to AASB 3 Business
Combinations (see Example D). These examples include “use rights” such as
“route authorities” and other drilling, water, air, mineral and timber cutting rights.
Under AASB 138, easements are likely to be valued on an historical cost basis
(para 74), because it is unlikely that an active market in easements exists to
allow for fair value measurement (AASB 138, para 78). Prior to the adoption of
AEIFRS, easements were accounted for in accordance with AASB 1041, in the
same manner as all other property, plant and equipment (i.e. at fair value). As
an intangible asset, easements will also be subject to impairment testing in
AASB 136 (AASB 138, para 111 and AASB 136, paras 106-107).
7.12 Other references
Reference should be made to other Treasury publications that deal with
financial reporting matters: http://www.treasury.nsw.gov.au/account/finrpt.htm
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Appendix A
General valuation principles
1.
AASB 116 Property, Plant and Equipment
Property, plant and equipment are to be valued at fair value in accordance with
Australian Accounting Standard AASB 116. The requirements of AASB 116 are
basically contained in paragraphs 31 to 33.
“After recognition as an asset, an item of property, plant and equipment
whose fair value can be measured reliably shall be carried at a revalued
amount, being its fair value at the date of the revaluation less any
subsequent accumulated depreciation and subsequent accumulated
impairment losses. Revaluations shall be made with sufficient regularity
to ensure that the carrying amount does not differ materially from that
which would be determined using fair value at the reporting date”
(AASB 116, para 31).
“The fair value of land and buildings is usually determined from marketbased evidence by appraisal that is normally undertaken by
professionally qualified valuers. The fair value of items of plant and
equipment is usually their market value determined by appraisal” (AASB
116, para 32).
“If there is no market-based evidence of fair value because of the
specialised nature of the item of property, plant and equipment and the
item is rarely sold, except as part of a continuing business, an entity
may need to estimate fair value using an income or a depreciated
replacement cost approach” (AASB 116, para 33).
2.
AASB 140 Investment Property
Investment property is to be valued at fair value in accordance with Australian
Accounting Standard AASB 140. The requirements of AASB 140 are basically
contained in paragraphs 36 to 52 of the standard, reproduced below:
“The fair value of investment property is the price at which the property
could be exchanged between knowledgeable, willing parties in an arm’s
length transaction (see paragraph 5). Fair value specifically excludes
an estimated price inflated or deflated by special terms or
circumstances such as atypical financing, sale and leaseback
arrangements, special considerations or concessions granted by
anyone associated with the sale” (AASB 140, para 36).
“An entity determines fair value without any deduction for transaction
costs it may incur on sale or other disposal” (AASB 140, para 37).
“The fair value of investment property shall reflect market conditions at
the reporting date” (AASB 140, para 38).
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“Fair value is time-specific as of a given date. Because market
conditions may change, the amount reported as fair value may be
incorrect or inappropriate if estimated as of another time. The definition
of fair value also assumes simultaneous exchange and completion of
the contract for sale without any variation in price that might be made in
an arm’s length transaction between knowledgeable, willing parties if
exchange and completion are not simultaneous” (AASB 140, para 39).
“The fair value of investment property reflects, among other things,
rental income from current leases and reasonable and supportable
assumptions that represent what knowledgeable, willing parties would
assume about rental income from future leases in the light of current
conditions. It also reflects, on a similar basis, any cash outflows
(including rental payments and other outflows) that could be expected in
respect of the property. Some of those outflows are reflected in the
liability whereas others relate to outflows that are not recognised in the
financial statements until a later date (e.g. periodic payments such as
contingent rents)” (AASB 140, para 40).
“Paragraph 25 specifies the basis for initial recognition of the cost of an
interest in a leased property. Paragraph 33 requires the interest in the
leased property to be re-measured, if necessary, to fair value. In a lease
negotiated at market rates, the fair value of an interest in a leased
property at acquisition, net of all expected lease payments (including
those relating to recognised liabilities), should be zero. This fair value
does not change regardless of whether, for accounting purposes, a
leased asset and liability are recognised at fair value or at the present
value of minimum lease payments, in accordance with paragraph 20 of
AASB 117. Thus, remeasuring a leased asset from cost in accordance
with paragraph 25 to the fair value in accordance with paragraph 33
should not give rise to any initial gain or loss, unless fair value is
measured at different times. This could occur when an election to apply
the fair value model is made after initial recognition” (AASB 140, para 41).
“The definition of fair value refers to “knowledgeable, willing parties”. In
this context, “knowledgeable” means that both the willing buyer and the
willing seller are reasonably informed about the nature and
characteristics of the investment property, its actual and potential uses,
and market conditions at the reporting date. A willing buyer is
motivated, but not compelled, to buy. This buyer is neither over-eager
nor determined to buy at any price. The assumed buyer would not pay
a higher price than a market comprising knowledgeable, willing buyers
and sellers would require” (AASB 140, para 42).
“A willing seller is neither an over-eager nor a forced seller, prepared to
sell at any price, nor one prepared to hold out for a price not considered
reasonable in current market conditions. The willing seller is motivated
to sell the investment property at market terms for the best price
obtainable. The factual circumstances of the actual investment property
owner are not a part of this consideration because the willing seller is a
hypothetical owner (e.g. a willing seller would not take into account the
particular tax circumstances of the actual investment property owner)”
(AASB 140, para 43).
New South Wales Treasury
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“The definition of fair value refers to an arm’s length transaction. An
arm’s length transaction is one between parties that do not have a
particular or special relationship that makes prices of transactions
uncharacteristic of market conditions. The transaction is presumed to
be between unrelated parties, each acting independently” (AASB 140,
para 44).
“The best evidence of fair value is given by current prices in an active
market for similar property in the same location and condition and
subject to similar lease and other contracts. An entity takes care to
identify any differences in the nature, location or condition of the
property, or in the contractual terms of the leases and other contracts
relating to the property” (AASB 140, para 45).
“In the absence of current prices in an active market of the kind
described in paragraph 45, an entity considers information from a
variety of sources, including:
(a) Current prices in an active market for properties of different nature,
condition or location (or subject to different lease or other contracts),
adjusted to reflect those differences;
(b) Recent prices of similar properties on less active markets, with
adjustments to reflect any changes in economic conditions since the
date of the transactions that occurred at those prices; and
(c) Discounted cash flow projections based on reliable estimates of
future cash flows, supported by the terms of any existing lease and
other contracts and (when possible) by external evidence such as
current market rents for similar properties in the same location and
condition, and using discount rates that reflect current market
assessments of the uncertainty in the amount and timing of the cash
flows” (AASB 140, para 46).
“In some cases, the various sources listed in the previous paragraph
may suggest different conclusions about the fair value of an investment
property. An entity considers the reasons for those differences, in order
to arrive at the most reliable estimate of fair value within a range of
reasonable fair value estimates” (AASB 140, para 47).
“In exceptional cases, there is clear evidence when an entity first
acquires an investment property (or when an existing property first
becomes investment property following the completion of construction
or development, or after a change in use) that the variability in the range
of reasonable fair value estimates will be so great, and the probabilities
of the various outcomes so difficult to assess, that the usefulness of a
single estimate of fair value is negated. This may indicate that the fair
value of the property will not be reliably determinable on a continuing
basis (see paragraph 53)” (AASB 140, para 48).
New South Wales Treasury
page
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[amended by NSWTC 12/05 and NSWTC 10/07]
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“Fair value differs from value in use, as defined in AASB 136
Impairment of Assets. Fair value reflects the 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:
(a) Additional value derived from the creation of a portfolio of
properties in different locations;
(b) Synergies between investment property and other assets;
(c) Legal rights or legal restrictions that are specific only to the current
owner; and
(d) Tax benefits or tax burdens that are specific to the current owner”
(AASB 140, para 49).
“In determining the fair value of investment property, an entity does not
double-count assets or liabilities that are recognised as separate assets
or liabilities. For example:
(a) Equipment such as lifts or air-conditioning is often an integral part
of a building and is generally included in the fair value of the
investment property, rather than recognised separately as property,
plant and equipment;
(b) If an office is leased on a furnished basis, the fair value of the office
generally includes the fair value of the furniture, because the rental
income relates to the furnished office. When furniture is included in
the fair value of investment property, an entity does not recognise
that furniture as a separate asset;
(c) The fair value of investment property excludes prepaid or accrued
operating lease income, because the entity recognises it as a
separate liability or asset; and
(d) The fair value of investment property held under a lease reflects
expected cash flows (including contingent rent that is expected to
become payable). Accordingly, if a valuation obtained for a
property is net of all payments expected to be made, it will be
necessary to add back any recognised liability, to arrive at the fair
value of the investment property for accounting purposes” (AASB
140, para 50).
“The fair value of investment property does not reflect future capital
expenditure that will improve or enhance the property and does not
reflect the related future benefits from this future expenditure” (AASB
140, para 51).
“In some cases, an entity expects that the present value of its payments
relating to an investment property (other than payments relating to
recognised liabilities) will exceed the present value of the related cash
receipts. An entity applies AASB 137 Provisions, Contingent Liabilities
and Contingent Assets to determine whether to recognise a liability and,
if so, how to measure it” (AASB 140, para 52).
New South Wales Treasury
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Appendix B
Valuation of land
1.
Practical considerations in land valuation
The key principle in all real estate valuations is to determine the monetary price
at which an asset would sell in open market trading among willing but not
anxious parties who were all aware of the nature and potential of the property at
the date of valuation. The essential elements are the knowledge of the relevant
features of the assets and the understanding of the comparable property
markets.
An important aspect in property valuations is the identification of all elements
that would be taken into account by buyers and sellers in setting the price.
Some of the basic elements include the land's description, area and/or
dimensions, the legal or other interest of the entity, planning and other
constraints on development, the availability of services, the potential for
alternative use and the physical impediments existing in the land.
It is recognised that often there will be no active market in the types of assets
being valued because of the unique nature of those assets. It is, however, the
task of the valuer to establish appropriate value levels from market evidence of
similar land types (based on existing use or feasible alternative use – refer
section 2.3.1 of the Policy) and to document the processes and assumptions
used to arrive at such levels. Given that the aim is to obtain realistic
assessments of entities' land holdings, particularly those for which market
values are not usually available, it is important to be able to show the rationale
of those assessments. It is also necessary for the valuation reports to clearly
state the methodology used to determine the values and to indicate that either
all properties have been inspected and valued or a sampling process has been
used to arrive at the figures.
The valuation of an asset for financial reporting purposes is not necessarily the
same as the original acquisition cost to the entity. That cost might have
represented the value to the vendor including development rights that no longer
exist or improvements that have been removed. The valuation therefore should
be based on the asset in its current use and condition or feasible alternative
use.
A major issue in land valuation in the public sector is the size of the holdings of
some entities. In some cases, it may be a question of providing a selection of
benchmarks which are representative of the stock of land assets and making
sufficient valuations to validly sample the whole portfolio. In other cases, such
as the National Parks and Wildlife Service which has close to five million
hectares of land in New South Wales, the difficulty is that the entities concerned
may have land located throughout the State in a large number and variety of
holdings. In these circumstances, the opportunities for sampling are somewhat
restricted and will only be available after a rigorous process of categorising
holdings according to similar characteristics. Sampling techniques are
discussed in Appendix G.
New South Wales Treasury
page
5959
Valuation of Physical Non-Current Assets at Fair Value
[amended by NSWTC 12/05 and NSWTC 10/07]
2.
2.1
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Valuation methods for specific land assets
Crown land
For the purposes of this Policy, Crown land is defined as all land held by
government entities that remains unalienated from the Crown and for which
there is no title. It should be treated as any other asset controlled by
government entities and recognised in the financial statements of those entities
that have control over its economic benefits. There are a number of categories
of Crown land, including Vacant Crown Land, Crown Land held for
Development, and Crown Land subject to Perpetual Leases.
Vacant Crown land, such as large isolated rural parcels, should be valued in the
same way as national parks and water catchment areas. Care must be taken to
consider the possibility of claims being made and sustained under Native Title
legislation.
Crown Land that is designated for development and disposal is to be valued at
fair value having regard to the highest and best use of the land.
Crown Land that is subject to perpetual leases (including leases where there is
a statutory right to buy the freehold) is to be valued at the present value of net
cash flows received under the leases. The same principles apply here as would
in any valuation where the interest was less than freehold. The value to be
determined must reflect the extent of the interest of the entity in the asset.
Where appropriate, a note should be included in the financial statements
indicating the nature and extent of restrictions placed on the use and disposal of
the land.
2.2
National parks and reserves
The aggregate of land owned or controlled as national parks and reserves in
New South Wales exceeds 5 million hectares and represents a significant crosssection of all types of land in the State. Generally, these lands are held in
substantial parcels, often relatively unimproved or wilderness areas with no
prospects of alternative use because of the natural, legal or administrative
restrictions on the use of the lands.
National parks comprising large holdings outside cities or urban centres are to
be valued relative to adjoining similar lands with account taken of the state of
land improvement (particularly clearing) and statutory or planning controls on
subdivision or use. Consequently, a national park in the Western Division of the
State could have a land value similar to surrounding grazing properties.
A wilderness area near a coastal urban centre, however, would be valued using
evidence of markets for unimproved rural retreats, taking account of the
relevance of building and other development rights.
The valuation of parks and reserves in urban areas can also be established in
terms of the market values of comparable lands as long as care is taken to
identify and account for any restrictions and circumstances peculiar to the land
being valued. In many cases, a national park reserve will have similar rights of
use as a local park, i.e., public recreation, limited by the protection of the
environment. A bushland reserve would therefore have a valuation based on the
market for land that cannot be developed and further restricted by any statutory
duties imposed on the National Parks and Wildlife Service.
New South Wales Treasury
page
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The values of parkland in urban areas are not normally related to the values of
adjacent developed land. Generally, there are sufficient instances of sales of
land for recreation, open space or similar purposes to establish a framework
and allow valid comparisons.
For example, the land in a Western Division park can be valued at a rate per
unit (per hectare, or per sheep area) relative to adjoining comparable rural
properties but excluding any element of development potential, such as
irrigation potential, not available to the entity. The same principle applies for a
national park on the Coast. Any potential, say for tourist development, has to be
excluded despite the fact that the acquisition of the land would have cost the
entity an amount that compensated the former owner for any potential that then
existed. This is because the asset is now in the control of the entity subject to its
current restrictions. Urban sites are treated the same, and any valuation must
take account of the existing development potential and not impute any that
cannot be realised.
2.3
Parks and botanic gardens
As stated above, there is generally an active market in land for recreation, open
space and similar purposes. This can be utilised to assess values for parklands
as long as care is taken to isolate factors such as development potential in the
prices being paid in the market. It is important to recognise that the values of
adjoining developed lands are based on different criteria and potential and are
consequently not to be taken as setting park values.
Notwithstanding the scientific, cultural and heritage considerations usually
associated with the Botanic Gardens, and their location in the centre of the
CBD, the land value of a botanic gardens site is to be determined consistently
with other parks. The same applies to large urban parcels such as Sydney's
Centennial Park and Moore Park. Such land should be valued at fair value for
existing use, because of the lack of any feasible alternative use.
2.4
Land in water catchment areas
The valuation principles applying are the same as for national parks. In many
cases, the controls in catchment areas are less restrictive and may permit uses
such as grazing and rural dwellings. Consequently, values will be more closely
aligned to the rural market. Most catchments cover very large areas and the
valuation should reflect the size of the total holding, the limitations on
development and the purpose of the controlling entity. That part of the
catchment that is surface degraded, because it is underwater, should not be
discounted in value. Normally it forms only a small proportion of the whole and
is an inevitable result of the process of construction of the works.
New South Wales Treasury
page
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Valuation of Physical Non-Current Assets at Fair Value
[amended by NSWTC 12/05 and NSWTC 10/07]
3.
Valuation of land under specialised plant,
buildings and infrastructure assets
3.1
Land under roads
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Section 3.1 deleted by NSWTC 10/07. Refer Treasury Circular for more
details.
The assessment of the value of land under public roadways poses problems in
determining a reliable value. Public roads are provided for the benefit of the
community and the funding required to maintain the assets comes primarily from
general revenue, as well as from licence fees, Government grants, tolls etc.
The assets are used by the public and the public have definite rights over the
land, as distinct from a transmission line or pipeline which provides an entity
with an exclusive means of reticulating a service, often over someone else's
land by way of easement.
Further, a distinction may be made between roads that provide major arterial
traffic flow with restricted access such as freeways and those that are purpose
built to facilitate “through traffic” (State roads) and general access roads which
provide access and services to adjoining properties by right (common
carriageways). Although main roads are State roads and have features similar
to major arterial roads, they can be common carriageways.
The Australian Accounting Standards Board has attempted to overcome the
practical difficulties with valuing land under roads. However, it has issued AASB
1045 Land under Roads: Amendments to AAS 27A, AAS 29A and AAS 31A.
This standard, as amended by AASB 2006-3, extends the transitional provisions
relating to the recognition of lands under roads to the end of the first reporting
period ending on or after 31 December 2007.
Because this issue remains unresolved, this Policy does not require (but does
not prohibit) the valuation of land under roads.
3.2
Land under railways
Rail networks provide services including passenger and freight on a commercial
basis and generally occupy land exclusively to do so. A railway, unlike a road
system, does not provide access or services to owners of adjoining properties
by right and it is important that valuations recognise this distinction.
Valuations of the land under rail networks exclude tracks and ancillary works,
i.e. tunnels, embankments and cuttings. The land to be valued assumes,
therefore, that the "surface" remains at its natural state, that is, the state existing
prior to the construction of the works, i.e. before tunnelling, cutting or filling. This
will be an important consideration in assessing value for rail corridors as the
"natural" state of the land might have been an impediment to alternative
development. Such costs should be considered in valuing the rail infrastructure
network.
Typically, railways have large areas of goods yards as integral parts of their
operations. The existing use fair value of the goods yards will generally relate to
adjoining land values, especially where that is industrial in usage but care has to
be taken to ensure that the railway land can be developed and serviced. It is
often the case that goods-yards do not have access to water and sewerage
reticulation sufficient for large scale redevelopment, or have other impediments
to alternative uses.
New South Wales Treasury
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Examination of NSW railway corridors indicates that few sections in the
metropolitan areas have potential for alternative use. Their value is best
expressed as undeveloped industrial or residential land discounted to allow for
constraints of development; e.g. shape and size, the limitations of access and
serviceability, and bearing in mind the need for the entity to maintain the entire
network.
The main exceptions are those areas of railway land near retail centres where
adjoining commercial values (i.e. highest and best use) could be appropriate.
This is subject to establishing the extent of the ability to provide "services" (e.g.
water, electricity etc) to the land and the feasibility of alternative use, that is,
bearing in mind the need for the entity to maintain the whole network. Such land
should be valued at fair value having regard to the highest and best use of the
asset.
Generally, railway lands in rural areas will be valued at existing use, based on
adjoining land values. Where a railway line is "disused", and would not as a
consequence be replaced, it is to be valued at fair value having regard for the
highest and best use, i.e. based on the greater of current market selling value
and the present value of future net cash inflows. In practical terms, the value
will be related to current adjoining land values given the absence of anticipated
cash flows from disused lines.
As an example, a section of railway 135 km long between the metropolitan area
and a country centre passes through 15 km of residential areas with 4 suburban
stations, one with a 4 hectare goods-yard, 90 km of mixed farming land and 20
km of national park, then into the country town through the industrial area to the
retail centre. Records and inspections confirm that the only locations where the
line is wide enough to permit redevelopment are at the goods-yard, one
suburban station and the country retail centre.
The following values are based on analysis of the sales of comparable
properties along this route:90 km )
20 km )
10 km )
15 km )
@ average
20m
wide
Rural
National Park
Urban
Country
Goodsyard
(potential
Industrial)
Retail
(suburban
site)
Country
180 ha
40 ha
30 ha
20 ha
4 ha
@ $400
@ $75
@ $30,000
@ $7,500
@ $60,000
72,000
3,000
900,000
150,000
240,000
2000m2
@ $80
160,000
1000m2
@ $60
60,000
$1,585,000
The total value of this section of land under the railway is $1,585,000 which
equals $11,740 per km overall.
New South Wales Treasury
page
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Valuation of Physical Non-Current Assets at Fair Value
[amended by NSWTC 12/05 and NSWTC 10/07]
3.3
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Land under special purpose buildings
The following examples show the valuation approaches that are to be applied to
assess the values of land under hospitals and schools. The two examples
illustrate circumstances where there are feasible alternative uses because of the
government’s and community’s recognition of demographic changes. Therefore,
the land will be valued at highest and best use, i.e. the greater of existing and
feasible alternative use. If there were no feasible alternative uses, because the
service is needed/mandated to continue to be provided at that location, the land
would be valued at existing use value in accordance with these guidelines. The
same approaches can be adopted for court houses, prisons and other similar
facilities.
1. The site of a surplus inner suburban hospital. As an example, assume a
parcel of land of about 2.5 hectares with frontage to a main road and access
to side or rear streets. Old hospital buildings are erected on the site. All the
usual utility services are available to the site and the property. While zoned
for a hospital, the land is surrounded by residential development with some
potential for commercial/retail uses on the main road.
Value at "Existing Use" (land only)
Value of 2.5 hectares @ $1,300,000 per hectare based on
analysis of sales of private hospital sites.
$3,250,000
Value of "Feasible Alternative" say 48 Town House sites
2,000 square metres of commercial land
Less cost of site remediation
approvals, rezoning
services, Council contributions
Net Value
48 @ $65,000
2,000 @ $275/sq m
225,000
140,000
205,000
3,670,000
570,000
$3,100,000
The existing use value of the site is greater and the amount of $3,250,000 is
adopted as the fair value in accordance with this Policy.
2. The site of a surplus outer suburban school. As an example, assume a
parcel of about 4 hectares located in a modern residential development on
which is erected a ten year old secondary school with playing fields,
hall/gymnasium etc. The site is level land, with the playing areas at the rear,
access to a busy road and the usual utility services. It is zoned for a school
and alternative potential would be limited to 50% residential as the rear land
is too low to be serviced and built on.
New South Wales Treasury
page
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Valuation of Physical Non-Current Assets at Fair Value
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Value at "Existing Use" (land only)
4 hectares @ $325,000 per hectare based on analysis of
"en-globo" land sales in the district, which have a range of
potential uses including long term residential but currently
zoned "non-urban"
$1,300,000
Value of "Feasible Alternative" say 20 homesites and 2 hectares of open space
20 sites @ $100,000
2 hectares @ $40,000
Less Subdivision development costs
Roads constructions
)
Water and Sewerage )
Selling and Holding
Profit and Risk Factors
Net Value
2,080,000
300,000
145,000
245,000
690,000
$1,390,000
The feasible alternative use value is greater and the amount of $1,390,000 is
adopted in accordance with the Guidelines.
3.4
Land under power stations, gas works, etc.
Power stations are constructed close to coal mines, adjacent to water supplies
adequate for cooling and generally the locations are dictated by environmental,
employment and other considerations. As a result, the stations are normally
constructed on substantial areas of rural lands. This is in contrast to the earlier
practice that had power stations and gas works built in cities at the ports where
coal could be delivered by sea or rail and which were adjacent to workforce
living areas.
Conventional valuation principles apply to the land under these types of
infrastructure developments. The value of power station sites would usually be
comparable to similar, adjoining rural properties, as long as care is taken to
factor in any premium normally paid in the market for land associated with
infrastructure projects and account is taken of the value to the power station of
an assured water supply. Any premium will reflect the added value of securing
the full control of surrounding land and securing development approvals.
Generally, the resulting valuation will be greater than "rural value".
Gasworks sites are usually located in or near industrial centres but, while
"industrial" values will be relevant, care will have to be taken to identify
problems of feasible alternative use. For example, a large gasworks site might
be located on an isolated riverfront headland with only limited access or utility
services potential. It could be incapable of economic redevelopment for
alternative industrial uses, and too heavily contaminated for residential use.
The alternative might then be limited to open space. This would ensure a
valuation as a large industrial parcel with only a restricted range of options.
Similar problems will exist wherever old style operations related to utility service
generation continue to affect the use and value of the sites.
New South Wales Treasury
page
6565
Valuation of Physical Non-Current Assets at Fair Value
[amended by NSWTC 12/05 and NSWTC 10/07]
3.5
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Land under Parliament House, Government House, and
historic houses and other heritage buildings
Land under heritage buildings, such as Parliament House, Government House
and historic houses are sites with limited (restricted) potential for development
for alternative uses.
The site of Parliament House is a CBD site with restricted potential. The
restrictions relate to the existing buildings and account will have to be taken of
any requirements for maintenance of heritage items. In practice, the
development potential of the land cannot be replicated in the market and the
valuation must be limited to assessing the value of a site that is in that specific
location, has that area of commercial building erected thereon and the ancillary
service features. The main market evidence that will assist in arriving at a
valuation will be CBD land sites that have been sold with heritage or similar
constraints.
The site of Government House in the city is to be valued similarly, i.e. as a
residential site possessing all its attributes but limited by the restrictions, if any,
on use of the site and the requirement to preserve the improvements. The most
comparable market evidence will be found in Sydney's premier residential
suburbs with valuation judgements necessarily being made to account for limits
on redevelopment potential that might exist in the free market.
The values of the sites of historic houses and similar heritage buildings will be
established as residential values in the areas that they are located subject to the
restrictions imposed by the existence of the buildings and Heritage Orders. The
main effect of such restrictions will be to eliminate redevelopment potential and
will ensure that the valuation is related to the extent of the protected use. As an
example, the value of the site of a large heritage listed house will exclude any
development potential that might have occurred if the property was in private
ownership. This is because the purpose of the Heritage Order is to protect the
property from that development and, in doing so, the potential no longer exists.
All government properties (which do not have a formal protection) should be
valued in the same way as historic houses if it is expected that an Heritage
Order would be imposed on them in the event that they were to be sold.
New South Wales Treasury
page
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Appendix C
Main differences – TPP 07-1 compared to TPP 05-3
The main changes compared to the previous TPP 05-3 are summarised below.

Removal of Australian Guidance to AASB 116 after issue of TPP 05-3 –
There will be no difference resulting from the removal of the Australian
Guidance to AASB 116 for NSW public sector entities, as this Policy has
been amended, based on references to similar requirements in other
current Accounting Standards, or by incorporating the withdrawn Guidance
into this Policy, where indicated.
However, relevant sections have been updated, as follows:






Section 2.3 ‘Step One – Guidance to apply AASB 116 Valuation
Principles’;
Section 2.5 ‘Clarified Decision tree’ – there is no change to the structure
of the decision tree; however, with the removal of the Australian
Guidance, most of the decision tree guidance is now represented by
additional Treasury Policy.
Section 3.3.3 regarding additional AASB 140 guidance on fair value –
updated to include additional references to AASB 140, given that
previously duplicating guidance in the AASB 116 Australian Guidance
has now been omitted.
Section 4.4.4 ‘Spares for plant and equipment’.
Appendix A ‘General Valuation Principles’ – copy of withdrawn
Australian Guidance to AASB 116 has been omitted.
Other minor amendments throughout to omit reference to the withdrawn
Australian Guidance to AASB 116.

Impairment of non-cash generating assets of a not-for-profit entity (section
2.4.3) – Further clarification that an asset of a not-for-profit entity that does
not belong to a cash generating unit, cannot be impaired under AASB 136
(unless selling costs are material). This is the case, whether or not the
‘value in use’ is depreciated replacement cost (AASB 136, para Aus6.1).
This is because the recoverable amount cannot be lower than fair value in
AASB 116, unless selling costs are material.

Additional guidance distinguishing ‘investment property’ from other property
(refer section 3.3.2) – In response to queries raised by agencies, the Policy
includes additional Treasury guidance distinguishing ‘investment property’
(that is subject to AASB 140) from other property.

Restatement of gross amount and accumulated depreciation (section 7.1) Clarification that accumulated depreciation is restated based on the gross
replacement cost for disclosure purposes only.

Conduct of valuations (section 7.6) – Clarification that where independent
valuations are obtained by agencies, it is the agencies’ responsibility to
review these valuations to ensure that they are appropriate prior to their use.

Land under roads (Appendix B, section 3.1) – The Policy has been updated
for AASB 2006-3, which extended the transitional provisions to the end of
the first reporting period ending on or after 31 December 2007.
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Appendix D
Main differences compared to previous Australian
requirements on first time adoption of AEIFRS in
2005/06
1.
AASB 116 Property, Plant and Equipment
AASB 116 consolidates and substantially replicates the requirements of
replaced Australian Standards in regard to fair value measurement, except for
the areas discussed below. AASB 116 replaced AASB 1041 Revaluation of
Non-Current Assets; AAS 4 Depreciation; and AAS 21 Acquisition of Assets on
first time adoption of AEIFRS.
1.1





Cost
Cost under AASB 116 differs to cost under AASB 1041 because of new
treatments in the areas discussed below.
Restoration Costs: Cost includes the initial estimate for dismantling,
removing and restoring an asset, arising from both:
 an obligation incurred as a consequence of installing the item; and
 an obligation incurred as a consequence of using the item during a
particular period (AASB116, para 16(c)).
IAS 16 Basis for Conclusions para BC 16 notes that the above applies
whether assets are measured at cost or revalued amount. Previous
accounting standards did not address this issue. Under AASB 137
Provisions, Contingent Liabilities and Contingent Assets provisions include
both legal and constructive obligations (AASB 137, para 14).
Major inspections (AASB 116, para 14):
 The cost of major inspections for faults is recognised in the carrying
amount of an asset as a replacement, if the recognition criteria are
satisfied (regardless of whether the cost of an inspection was initially
identified when the item was acquired or constructed).
 The remaining carrying amount of the previous inspection (as distinct
from physical parts) is derecognised.
 The estimated cost of a future inspection may be used to estimate the
cost of the inspection component when the item was acquired or
constructed.
Borrowing Costs: Interest costs directly attributable to the acquisition,
construction or production of a qualifying asset may be capitalised or
expensed based on AASB 123 Borrowing Costs. Previously, there was no
choice available under AAS 34. Treasury has mandated expensing for
general government sector entities. Public trading enterprises (PTEs) may
choose either option.
Cost of acquisition of property, plant and equipment (PP&E) in exchange for
non-monetary assets or in combination with monetary assets. Cost of such
an acquisition is measured at fair value, unless either the transaction lacks
commercial substance or neither the fair value of assets received nor given
up is reliably measurable (AASB 116, para 24). Commercial substance of a
transaction is discussed at AASB 116, para 25. AASB 1015 assumed that
fair value could always be measured.
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1.2





1.3


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Fair value
Assets may be measured at fair value where “fair value can be measured
reliably” (AASB 116, para 31).
Fair value is discussed but only very briefly. Fair value is determined:
 From market-based evidence; or
 By using an income or depreciated replacement cost approach (AASB
116, paras 32-33). However, in Treasury’s Asset Valuation Policy, for
specialised assets, in the absence of market evidence, entities must
apply depreciated replacement cost rather than an income approach
(refer section 2.3.5). This is consistent with the previous AASB 1041
requirements.
Additional “Guidance” 6 is provided on fair value, frequency of revaluation
and accounting for spare parts. This guidance is not part of the standard, but
it replicates some of what was in AASB 1041.
On revaluation, either the ‘gross restatement’ or the ‘net amount’ method
(where accumulated depreciation is eliminated) may be used (AASB 116,
para 35). Conversely, AASB 1041 para 5.8 allowed the gross restatement
method only where assets are valued by reference to values of assets
newer than those being revalued. This Policy mandates the ‘gross
restatement’ method (refer section 7.1).
AASB 136 Impairment of Assets deals with impairment of assets separate
to AASB 116. Previously, under AASB 1041, impairment (or the recoverable
amount test) was seen to be part of fair value. This is theoretically more
correct, but the change has no practical effect.
Assets and parts of assets
AASB 116 does not prescribe the unit of measure for recognising assets,
that is, what constitutes an item of PP&E. Therefore, judgement is required
to apply the recognition criteria to an entity (AASB 116, para 9). There is
discussion regarding parts of assets, but parts of assets are not separate
assets. Previously, AASB 1021 para 5.7.3 required ‘components’ to be
accounted for as ‘separate assets’.
This notes that parts of some assets may require replacement (AASB 116,
para 13) and requires the following:
 The cost of replacing a part of an item shall be recognised in the
carrying amount of the item (AASB 116, para 13);
 The replaced part must be derecognised regardless of whether it had
been depreciated separately (AASB 116, para 70); and
 Each part of an item of PP&E with a cost significant in relation to the
total cost of the item shall be depreciated separately (AASB 116, para
43).
6
However, this Guidance has subsequently been omitted by the AASB, and this Policy has been
accordingly updated.
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1.4

1.5

1.6
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Asset revaluation reserves
For-profit entities must account for revaluation reserve balances on an
individual asset basis. This is a change from AASB 1041 which permitted
the ‘class of asset’ approach. This change could have a negative impact on
unappropriated profits. However, as discussed above, AASB 116 does not
prescribe the unit of measure for recognising assets, that is, what
constitutes an item of PP&E. Therefore, an asset, not a part of an asset, is
the basis for accounting for movement in the asset revaluation reserve.
However, not-for-profit entities may continue to use the class of asset
approach (AASB 116, para Aus39.1 & Aus40.1).
Easements
Easements must be accounted for in accordance with AASB 138 Intangible
Assets rather than AASB 116, because easements are an “interest in land”
that is intangible rather than tangible in nature. As such, they meet the
definition of an intangible asset in AASB 138. Previously, they were
accounted for in accordance with AASB 1041, in the same manner as all
other property, plant and equipment (i.e. at fair value). The main impact of
this change is that under AASB 138, easements are likely to be valued on
an historical cost basis. This is because it is unlikely that an active market in
easements will exist to allow for fair value measurement.
Disclosures for revalued assets
AASB 116 requires more disclosures for items of PP&E measured at a revalued
amount, as follows:



The methods and significant assumptions applied (AASB 116, para 77(c))
(versus methods in AASB 1041, para 7.1(a)).
A split of fair value between: the amount determined by observable prices in
an active market, recent market transactions, and the amount estimated by
using other techniques (AASB 116, para 77(d)).
For-profit entities must disclose, for each class, the amount that would have
been recognised under the cost method (AASB 116, para 77(e)). But notfor-profit entities are exempted from this disclosure (AASB 116, para
Aus77.1).
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AASB 136 Impairment of Assets
This standard addresses the recognition, measurement and impairment of
assets. It largely replicates the recoverable amount test in AASB 1010
Recoverable Amount of Non-Current Assets and AASB 1041 Revaluation of
Non-Current Assets, except for differences discussed below.
2.1
Differences compared to previous Standard

AASB 136 determines impairment for all assets (current, non-current, at
cost or revalued), except those subject to another standard that has
impairment provisions; e.g. inventories, financial assets covered by AASB
139 Financial Instruments: Recognition and Measurement, investment
properties valued at fair value and non-current assets held for sale, etc
(AASB 136, para 2). This scope is wider than covered by AASB 1010 and
AASB 1041, which only applied to non-current assets, with different
exemptions.

Impairment of PP&E is addressed separately (in AASB 136) from the
measurement of an asset at cost or fair value (under AASB 116). This
creates a two step process for valuing PP&E. Previously, under AASB 1041,
impairment (or the recoverable amount test) was seen to be part of fair
value. This previous approach is considered to be theoretically more correct,
but the change has no practical effect.

AASB 136 requires an entity to assess at each reporting date whether there
is any indication that an asset (or cash-generating unit) may be impaired. If
such indication exists, the entity must estimate the recoverable amount.
AASB 1010/ AASB 1041 did not require an entity to consider indicators of
impairment.

Recoverable amount is defined in AASB 136 as the higher of an asset’s (or
cash-generating unit’s) fair value less costs to sell (or net market selling
price) and value in use, based on future cash flows (AASB 136, para 6).
Previously, recoverable amount in AASB 1041 and AASB 1010 was based
on a value in use or future cash flow concept only. However, the treatment
under previous Accounting Standards is effectively the same as AASB 136,
as “fair value less costs to sell” in AASB 136 is a narrower concept than
AASB 116 and presumes the existence of market-based evidence. This
means that for specialised assets, in the absence of a market selling price,
recoverable amount in AASB 136 is value in use, consistent with AASB
1041 and AASB 1010.

Value in use in AASB 136 is defined as depreciated replacement cost for
assets of not-for-profit entities that are not dependent on generating net
cash inflows (AASB 136, para Aus6.1).

A cash-generating unit is defined (AASB 136, para 6). Previously, AASB
1041 referred to a cash-generating operation but did not define it, and AASB
1010 referred to a ‘group’ of assets.

AASB 136 specifies different levels of aggregation at which impairment is
assessed (than AASB 1010 specified) (AASB 136, paras 69-71). The
implication of this is that the size of a cash-generating unit may often be very
large. These issues were not addressed in AASB 1041 or AASB 1010.

AASB 136 (para 33) describes the method for determining future cash
flows. AASB 1041 and 1010 did not address this.

AASB 136 (para 31 and 55) requires cash flows to be discounted to their
present value. AASB 1041 (para 5.1.10) referred to the net present value of
cash inflows and AASB 1010 (para 7.3.1) permitted, but did not require,
discounting.
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
AASB 136 (para 55-57) describes the discount rate to be used in calculating
recoverable amount. It notes that an entity may estimate the discount rate
taking into account the entity’s weighted average cost of capital (the Capital
Asset Pricing Model), the entity’s incremental borrowing rate, and other
market borrowing rates. AASB 1041 and AASB 1010 did not provide any
guidance on the discount rate to be used.

AASB 136 discusses how to deal with goodwill in testing for impairment
(AASB 136, para 81 and 90) and the order of writing down impairment
assets i.e. goodwill is written down first (AASB 136, paras 104-105). AASB
1041 covered this briefly at para 5.1.9 but AASB 1010 did not address this.

AASB 136 requires the impairment of corporate assets to be addressed at
the cash-generating unit level (AASB 136, para 101-2). AASB 1041 and
AASB 1010 did not address this issue.

AASB 136 states that the unwinding of the discount for an asset measured
at present value is not a reversal of an impairment, because the service
potential of the asset has not increased (AASB 136, para 116). AASB 1041
and AASB 1010 did not address this issue.
2.2
Impact on the public sector
For property, plant and equipment, little difference in practice is expected for the
NSW public sector, because Treasury’s previous Asset Valuation Policy (TPP
03-02) incorporated the principles in the standard, based on exposure drafts to
the current AASB 136. In particular,

AASB 136, para Aus6.2 defines a not-for-profit entity as “an entity whose
principal objective is not the generation of profits”. This is a significant
change, because AASB 1010 defined a profit-seeking entity as an entity that
had profit as one of its objectives.

In practice there is limited impact for the NSW public sector, mainly because
NSW public sector entities applied AASB 1041 rather than AASB 1010.
This was because AASB 1010 only applied where the cost basis was
applied, while NSW public sector entities are required to adopt fair value. In
contrast AASB 1041 did not refer to the for-profit / not-for-profit distinction
but achieved the same outcome as the current AASB 136 by saying that
specialised assets that are not part of a cash-generating operation must be
valued at depreciated replacement cost.

Specifically, AASB 136 provides that “in respect of not-for-profit entities,
value in use is depreciated replacement cost of an asset when the future
economic benefits of the asset are not primarily dependent on the asset’s
ability to generate net cash inflows and where the entity would, if deprived of
the asset, replace its remaining future economic benefits” (AASB 136, para
Aus6.1). This in effect exempts these assets from the impairment provisions
(AASB 136, para Aus32.1). Therefore, there is no impact in practice.

NSW Treasury’s previous Asset Valuation Policy (TPP 03-02) already
incorporated the principles in AASB 136, including the revised not-for-profit
entity definition, based on the exposure drafts issued at that time. At the
time the previous Asset Valuation Policy was issued, Treasury reviewed the
classification of Commercial Policy Framework agencies, on a basis that
was in-substance consistent with the new definition and with the separate
Treasury guidance provided (refer Treasury website).
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
This means that in principle, that at the date of transition to AEIFRS there
should be no difference in the for-profit / not-for-profit classification adopted
under the previous Asset Valuation Guidelines (TPP 03-02), unless an
entity’s circumstances have changed or there has been a reconstruction
within the public sector.

NSW Treasury’s previous policy required the use of management’s
estimates of cash flows for specialised assets and the use of discounted
cash flows, as now required by AASB 136.

AASB 136 para Aus32.2 states that replacement cost is measured by
reference to the lowest cost at which the gross future economic benefits of
the asset could currently be obtained in the normal course of business.
AASB 1041 para 5.1.9 merely stated that the best indicator of market buying
price is the replacement cost of the remaining economic benefits. But
Treasury’s current and previous policy includes the AASB 136 definition and
extensive additional guidance based on the concept of ‘incremental
optimisation’.

AASB 136 (para 55-57) describes the discount rate to be used in calculating
recoverable amount. AASB 1041 and AASB 1010 did not provide any
guidance on the discount rate to be used, but Treasury will continue to
mandate the use of the weighted average cost of capital.
3.
AASB 140 Investment Property
This is a new standard for Australia. Previously investment properties were
accounted for under AASB 1041 Revaluation of Non-Current Assets and AASB
1010 Recoverable Amount of Non-Current Assets. The main differences on first
time adoption of AEIFRS are summarised as follows:

AASB 140 permits investment properties to be measured using the cost or
fair value model. In contrast, AASB 1041 required either the cost or
revaluation model. The difference between the fair value model and
revaluation model is that under the fair value model, movements in fair value
are recognised in profit and loss rather than the asset revaluation reserve
and there is no depreciation. This is a difference for the NSW public sector,
because Treasury has mandated the AASB 140 fair value model for
investment property, where previously it mandated the revaluation model in
accordance with AASB 1041.

Fair value under AASB 140 is essentially the same as fair value under
AASB 116 and the previous AASB 1041. It is only the movement in fair
value and depreciation that is accounted for differently (as per previous dot
point).

Under AASB 140 a property interest held by a lessee under an operating
lease can be classified and accounted as investment property, in certain
circumstances. Previously lessees recognised operating lease payments as
an expense over the lease term based on the pattern of benefit.
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Appendix E
Comparison of fair value and deprival value
This Appendix compares fair value and deprival value. In the past, deprival
value has been adopted by some Public Trading Enterprises, following the
Guidelines on Accounting Policy for Valuation of Assets of Government Trading
Enterprises (October 1994). That document adopted the guidance provided in
Statement of Accounting Practice SAP 1 Current Cost Accounting regarding
measuring replacement cost. This Policy and its pre- AEIFRS predecessor
(TPP03-02) require entities to value certain physical non-current assets at
replacement cost, effectively also using the guidance provided in SAP 1 Current
Cost Accounting.
This Appendix notes the major differences between fair value in AASB 116,
subject to AASB 136 and deprival value and assesses the practical implications
of moving to fair value under this Policy.
Two major differences exist between fair value and deprival value:


Theoretical difference between fair value and deprival value concepts.
The use of market value in AASB 116 compared to the use of both market
value and net market value in certain circumstances under deprival value.
These two differences are briefly discussed below.
1.
Theoretical difference between fair value and
deprival value
Fair value is based on market evidence - a willing buyer and seller. In effect, this
is the ‘exit’ or selling price. The best available market evidence is used, but
where current market prices cannot be observed, fair value in AASB 116 is
measured at depreciated replacement cost, which is a market buying or entry
price.
Deprival value is measured by reference to the loss suffered by an entity on
being deprived of an asset (an entry price). The valuation is then determined
depending on whether the entity would or would not replace the asset. In this
sense, it is based on rational management intentions.
The difference between fair value and deprival value is the difference between
selling price and buying price. However, where current market prices can be
observed for the same or similar asset, market selling price and buying price will
be approximately equal.
Conversely, where current market prices cannot be observed, market selling
price and market buying price may differ significantly. Most proponents of exit
market price allow market buying price to be used as a surrogate for market
selling price. In this circumstance, AASB 116 and this Policy require fair value
to be measured at depreciated replacement cost, which is a market buying
price. AASB 116 does not acknowledge that market buying price is being used
as a surrogate for selling price. It acknowledges, however, that this is the best
available evidence of fair value where market (selling) prices cannot be
observed (AASB 116, para 33).
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Market value versus net market value
Deprival value requires surplus assets (i.e. assets held for sale without
replacement) to be valued at net market value. In these circumstances, fair
value (per AASB 116) and deprival value would differ by the incremental costs
directly attributable to selling the asset.
This difference is largely eliminated by the operation of either AASB 5 Noncurrent Assets Held for Sale and Discontinued Operations or AASB 136
Impairment of Assets, as follows.

“Surplus assets” that meet the definition of “held for sale” in AASB 5 must be
valued at the lower of its carrying amount and fair value less costs to sell.

“Surplus assets” that do not meet the AASB 5 “held for sale” definition are
subject to the recoverable amount test in AASB 136. The recoverable
amount is defined as the higher of net fair value (i.e. fair value less costs to
sell) and value in use.
3.
Conclusion
NSW Treasury’s conclusion from the above brief analysis is that there are no
material practical differences between fair value and deprival value.
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Appendix F
Guidance on the appropriate discount rate for
general purpose financial reporting
This appendix provides more detailed guidance on the issue of an appropriate
discount rate and supplements the discussion in this Policy as well as the
following Accounting Standard requirements and Treasury policies:

Guidance on the use of present value techniques in measuring value in use
(AASB 136, para 56 to 57 and Appendix A).

Commercial Policy Framework – Reporting and Monitoring Policy
(TPP 05-2); and

Guidelines for Financial Appraisal (TPP 97-4).
As outlined in section 5.7 of this Policy, the discount rate to be used for the
purposes of asset valuation for general purpose financial reporting under
Australian Accounting Standards must be a pre-tax rate (AASB 136, para 55).
Further, in determining an appropriate discount rate, an entity may take into
account its weighted average cost of capital (WACC) derived from the Capital
Asset Pricing Model (AASB 136, para A17(a)). Conversely, the Reporting and
Monitoring Policy and Guidelines for Financial Appraisal advocate the use of a
post- tax discount rate.
The different approach for reporting and monitoring compared to general
purpose financial reporting potentially gives rise to conversion and comparability
issues because of the following practical issues in converting a post-tax WACC
to a pre-tax one:
1.

Conversion and comparability issues
associated with a pre versus a post tax
weighted average cost of capital
Potential errors can arise from:

Reverse transformation – that is, conversion or grossing up nominal
post-tax estimates to pre-tax ones. The conversion process is
unsuitable for assessing revenues over multiple periods where the
business environment (principally taxes and inflation) is more likely to
change 7; and

Market transformation – that is, the conversion of market observable
data which are expressed as post-tax estimates to pre-tax figures.
Conversion formulae have been shown to be significantly in error in
estimating the correct return on equity, although this problem can be
overcome by modelling the expected cash flow and taxes over the life
cycle of the asset portfolio.
7
ACCC, New South Wales and Australian Capital Territory Transmission Network Revenue
Caps 1999-00 to 2003-04, Final Decision, January 2000.
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There is a high degree of complexity involved in tax calculations to derive
pre-tax figures from post-tax estimates8. For example:

The effective tax rates change over time due to timing and permanent
tax differences– assumed effective tax rates reflect a static scenario
when an entity’s tax situation would change over the period in which the
discounted cash flow analysis is undertaken.

The uncertainty associated with key input assumptions used in the
conversion process (such as tax rates and gamma) gives rise to a
range of potential WACCs rather than a precise WACC.
This uncertainty is highlighted in the NSW Independent Pricing and Regulatory
Tribunal 2004 electricity network pricing determination which estimated the
following range of feasible WACCs:

real pre-tax WACC of between 6.1% and 7.5%; and

nominal post-tax WACC of between 6.1% to 7.1% 9.
2.
NSW Treasury position
NSW Treasury is of the view that judgement is required in determining an
appropriate discount rate. Entities should:

Utilise a range of possible discount rates with a most likely rate, rather than
adopt a single precise discount rate, to appropriately recognise the
uncertainty associated with converting pre-tax WACCs from post-tax
WACCs. This is consistent with AASB 136 para A3(c) which considers that
the discount rate should reflect the range of possible outcomes rather than a
single amount;

Rely on generally accepted industry discount rates to assist in forming a
judgement on the most likely valuation; and

Undertake a sensitivity analysis which considers the pre-tax and post-tax
discount rate to:

Ensure that relevant scenarios are reviewed as part of the evaluation
process; and

Assist in determining an appropriate discount rate.
8
See submissions to the Victorian Essential Service Commission made by TXU Networks
and Multinet. TXU Networks, 2003 Gas Access Arrangement review, The Weighted Average Cost
of Capital for Gas Distribution, March 2002, page 42. Multinet Gas, Access Arrangement
Information Schedule 1 - The Weighted Average Cost of Capital for Gas Distribution, March 2002,
page 39.
9
IPART, Regulation of New South Wales Electricity Distribution Networks, Determination
and Rules Under the national Electricity Code, December 1999. IPART, NSW Electricity Distribution
Pricing 2004/05 to 2008/09 – Final Report, 10 June 2004,
http://www.ipart.nsw.gov.au/pubs_by_sub.htm.
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Appendix G
Use of sampling in asset valuation
It may be appropriate to value samples of an entity's assets, rather than all
assets individually, if it can be demonstrated that the results provide a fairly
accurate measure of the value of the relevant asset base. It may be appropriate
for the sample to be selected based on a statistical sampling technique, on the
advice of a consulting statistician.
This may be achieved by valuing identified “high value” items, with the
remainder of the assets being subject to a sampling methodology. Threshold
values will need to be developed for this purpose. Assets above the thresholds
would be valued individually, while assets below the thresholds would be
sampled on a random or other basis for valuation. It is important to obtain the
endorsement of the sampling methodology from the Audit Office prior to
undertaking the valuations.
Sampling techniques may particularly be useful, for example, for heritage /
cultural assets where there are incomplete catalogues and the total population
is not able to be identified; and where the population of assets is so large that it
is not feasible to value each asset. In these circumstances sampling techniques
are used on two levels, initially to establish the collection population and
secondly to obtain representative samples to apply to broader population
categories.
Once the collection population is established, the sampling exercise may involve
a number of steps including determining the sample size, selecting the sample,
drawing the sample, valuing the sample and calculating the total extrapolated
asset value. Sampling will have regard to location / storage, the homogeneity of
the items within the class and the expected range of values within the
population to be sampled.
To ensure a high level of statistical accuracy, the sample needs to be
representative of the whole population. Therefore, if a class of assets is not
completely homogenous, it will be necessary to “stratify” the population for
sampling purposes to ensure that the sample chosen is truly representative of
the whole population.
For heritage / cultural assets, this would normally require the subdivision into a
number of groups and sub-groups. A separate sample is then taken from each
sub-group. Within each sub-group, items should be approximately similar in
nature, value and the way they are stored. There should be as little variation in
characteristics as possible within each sub-group. This is commonly known as
“stratified sampling”.
Depending on the nature of the collection, there may be elements that range
from the priceless to the valuable to the "difficult to measure" category.
Examples could include the personal property of a colonial founder, an
extensive philately collection and a scientific collection. The first cannot be
valued by reliable measurement as it is unique; the second can be valued
readily and the third can only be valued if there is a reliable measurement
system that has been developed in the appropriate professional areas.
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Where reliable measurement is possible, once the samples have been valued,
the statistician will be able to extrapolate the values applied to the samples to
the whole population and calculate the degree of accuracy that has been
achieved.
The Audit Office may regard a possible error rate in excess of 10% as material
and, accordingly, may have difficulty in accepting the valuation. Detailed
information should be kept during the selection and valuation of samples to
validate the sampling methodology. Similar benchmarking techniques could be
used for entities that have a number of properties of the same type that could be
grouped into specific categories and assessed by way of sampling, e.g.
Department of Housing estates, Teacher Housing Authority housing,
Department of Education schools etc.
The application of the benchmarking technique would depend on the degree of
the comparability of the property within the entity's portfolio. The benchmark
properties selected should have similar characteristics and should follow a
consistent trend in value movement. The following key points would need to be
taken into account in applying the benchmarking approach to property assets:

It would be necessary for all properties within the portfolio to be categorised
in the first instance.

Benchmark properties would then be selected by the Valuer and they
should be representative of as much of the characteristics of the portfolio as
possible.

Subsequent revisions of valuations would involve an assessment of the
benchmarks by a Valuer and indexation of the various categories by a factor
reflecting the movement in the market between the prior valuation date and
the reporting date.

Any property that is unsuitable for benchmarking would need to be valued
individually.

Care would need to be taken to make adjustment for additional
improvements, redevelopment, demolition, change of use etc.

This method of assessment would only be suitable for a limited period and a
formal review of each sample should be undertaken periodically to ensure it
remains representative.
The main advantage of benchmarking is that valuation costs can be reduced
considerably due to the much smaller number of items that have to be valued.
The benchmarking approach can be extended to large non-urban holdings, such
as national parks or catchment areas, where the extent of development of
properties is generally known and the limitations imposed on use or
development reduce or even eliminate feasible alternatives. In these situations,
the process of valuation would be facilitated if inventories of improvements,
property records, air photos etc., were readily available. The valuer can then
undertake the required number of valuations or sample parts of the property
portfolio to provide the basis for assessing the values of the whole of the entity's
assets.
New South Wales Treasury
page
7979