Document ID: chunk:federal_register_of_legislation:F2023L00010:body:0:p80
Version: federal_register_of_legislation:F2023L00010
Segment Type: other
Provision Reference: 
Character Range: 214613–217620

for assets measured at current replacement cost and affected by economic obsolescence (eg excess capacity), an entity is required to perform two valuations (one based on the existing capacity, and another based on the estimated required capacity) in order to estimate the gross replacement cost and related accumulated obsolescence of the asset. The Board concluded that only one valuation, based on the required capacity (eg based on a school for 100 students in the example in paragraph F18 in the implementation guidance) would be required at the measurement date. However, the Board also noted that a linear relationship should not be assumed between the extent of economic obsolescence and a reduction in demand for a facility's services. Some assets composing a facility (such as a school) might need to be replaced in full to replace the facility's service capacity. Therefore, simply adjusting the asset's value for obsolescence by the percentage reduction in demand for the facility's services would result in a value that is less than the asset's fair value. In the example presented of a school, the current replacement cost of the school would not reduce by a linear amount per student attending, due to the need to maintain certain components of the school, even as student numbers decline.
BC217        In response to requests for clarification of the proposed guidance in ED 320 or additional examples, the Board included:
(a)                    in the implementation guidance, an example of an asset with 'surplus capacity' necessary to cater for periods of peak demand, and clarification (in the context of the example of a school with a strong indicator of economic obsolescence) that a linear relationship should not be assumed between the extent of any economic obsolescence and a reduction in demand for a facility's services; and
(b)                   an illustrative example (Example 5) illustrating that operating an asset for shorter periods than physically is possible, due to the operating environment of the not-for-profit public sector entity, does not of itself indicate economic obsolescence has arisen.

Physical and functional obsolescence
BC218        Some stakeholders requested the Board to consider adding guidance in Australian Accounting Standards to clarify how the curable and incurable parts of an asset's physical obsolescence (as described in IVS 105) should be considered when applying the cost approach. IVS 105 paragraph 80.5 states:
               Physical obsolescence can be measured in two different ways:
                    (a)  curable physical obsolescence, ie, the cost to fix/cure the obsolescence, or
                    (b)  incurable physical obsolescence which considers the asset's age, expected total and remaining life where the adjustment for physical obsolescence is equivalent to the proportion of the expected total life consumed. Total expected life may be expressed in any reasonable way, including expected life in years, mileage, units