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When discussing impairment, it is important to firstly determine the relevant impairment model which depends on the asset being assessed for impairment:

Relevant accounting standard

Assets covered

Summary of impairment model

AASB 136 Impairment of Assets

  • Infrastructure, property, plant and equipment
  • Right of use assets
  • Intangible assets.
  • Identify whether impairment indicators exist
  • Where impairment indicators exist, determine recoverable amount (being higher of fair value less costs of disposal and value in use)
  • See discussion below for exemption for certain public sector assets.

AASB 102 Inventories

  • All inventory held by council
    • Inventories to be measured at the lower of cost and net realisable value
    • Net realisable value provision required if selling price below cost.

    AASB 9 Financial Assets

    • Trade and Other receivables
    • Contract assets
    • Lease receivables
    • Expected credit loss (ECL) model using probability-weighted estimate of credit losses (i.e. present value of all cash shortfalls) over the life of the financial asset.


    Assets covered by AASB 136

    At 30 June 2020, councils need to determine whether there is any indication that an asset (or cash generating unit) may be impaired.  Generally, there is an impairment indicator in place over most assets at the time of writing, which is likely to exist at year end.

    Councils will need to estimate the recoverable amounts of the assets using either fair value less costs to sell or value in use (discounted cash flow calculation), subject to the exception below.

    AASB 136.Aus5.1 provides an exclusion for impairment testing where the asset is not held primarily for their ability to generate cash flows, but instead for the continued use of their service potential.  This exemption exists where the asset is held at fair value and its current carrying amount is not materiality different from its fair value.

    This is likely to be the case for many council assets, for example infrastructure assets (e.g. roads, bridges, sewerage and water assets), however councils will need to document that the fair value of any assets subject to the exemption is not materially different from the carrying amount.

    Inventory covered by AASB 102

    Depending on the inventory items held by council and as consumers and businesses change their purchasing habits, there may be an increase in net realisable value provisions.  Inventory with a short shelf life may be written off as the items are discarded due to a drop in demand. 

    The net realisable value of an inventory item should be based on the most reliable information at the reporting date regarding the net selling price of the inventory.

    If councils hold inventory held for distribution any loss of service potential will need to be estimated as these inventory items are held at cost less loss of service potential.

    Financial assets covered by AASB 9

    AASB 9 requires entities to use the expected credit loss (ECL) model to estimate the impairment of receivables.

    This assessment is forward-looking and requires consideration of a number of factors including:

    • Unemployment rates causing an increase in bad debts
    • Concentration of risk in certain businesses or geographical areas which are more exposed to the issues arising from COVID-19
    • Deferral of payment – due to the time value of money and higher risk of non-payment could result in expected credit losses.
    • Fair value of collateral held – a decline in the fair value may mean that the collateral held no longer covers the debt
    • Economic stimulus packages – what will this mean for customers and their ability to pay council.

    The ECL provision needs to be based on reasonable and supportable information considering:

    • Probability of default
    • Exposure – i.e. outstanding balance
    • Loss to council if the debtor defaults.

    There may need to be a COVID-19 overlay for some of the receivables balances as the assessment of the pandemic may be difficult at an individual debtor level.

    With respect to rates and statutory charges, the expected credit loss continues to be low where the property value is higher than the outstanding balance (including interest) where council has the ultimate ability to recover these charges through sale of the property. 

    Where a receivable for infrastructure charges has been recognised, councils should apply the expected credit loss model to these amounts and consider any information about the future economic environment and potential of non-payment.

    Last updated: Monday, Nov 30, 2020