Document ID: chunk:federal_register_of_legislation:F2023L00010:body:0:p74
Version: federal_register_of_legislation:F2023L00010
Segment Type: other
Provision Reference: 
Character Range: 198135–201118

manner of hypothetical replacement
BC194        Application of the cost approach assumes implicitly a hypothetical acquisition or construction of the subject asset occurs in the most economical manner. However, stakeholders informed the Board that in many cases, not-for-profit public sector entities would incur costs additional to the cheapest legally permitted costs in order to maintain an adequate quality of services to the public or to adhere to unlegislated Government policies that direct or limit replacement options, eg in relation to Australian industry content or security. Where the entity or another market participant replaces an asset, and it would necessarily incur greater costs than the cheapest legally permitted costs, the more expensive costs would be those most likely to be included in the pricing assumptions of the market participant and to be incurred in the ordinary course of operations. This view was included in ED 320 and was supported by a majority of respondents.
BC195        Therefore, the Board decided to include an illustrative example (Example 3) illustrating that, when paragraphs F5 and F11(b) apply, the entity estimates the cost currently required for a market participant buyer to acquire or construct a reference asset by using its own assumptions as a starting point and adjusting those assumptions to the extent that reasonably available information indicates that other market participants would use different data. Where, for the reasons noted in paragraph BC194, not-for-profit public sector entities would incur costs additional to the cheapest legally permitted costs, typically those additional costs would be included in the measurement of the asset's current replacement cost because there would not be reasonably available information indicating that other market participants would use different data. However, the treatment of such additional costs would depend on the facts and circumstances.

Finance costs
BC196        The Board was asked to provide guidance to not-for-profit public sector entities on whether they should include finance costs, including borrowing costs, in the fair value of an asset that is not held primarily for its ability to generate net cash inflows and is measured at current replacement cost under the cost approach if it necessarily takes a substantial period of time to get ready for its intended use (ie whether the current replacement cost of such an asset should include finance costs that would be incurred during a hypothetical construction). In particular, if a private sector entity constructs an asset on behalf of the not-for-profit public sector entity, and if finance costs were to be included in the asset's current replacement cost, some stakeholders asked for guidance on whether the private sector entity's, or public sector entity's, asset-specific borrowing rate should be used in estimating the finance costs.
BC197        The Board observed that the treatment of borrowing