IPSAS 21 — Impairment of Non-Cash-Generating Assets
Scope of IPSAS 21
IPSAS 21 applies to non-cash-generating assets. These are assets held mainly to deliver public services rather than to earn a commercial return.
A public entity may hold buildings, ICT systems, schools, clinics, libraries, roads, equipment or other assets that are not expected to generate direct cash inflows. The asset may still be important because it provides service potential to the public.
The first question is not whether the asset is still physically present. The first question is whether the carrying amount in the books is still supported by the remaining service potential of the asset.
The Big Picture
Impairment does not mean the asset is useless. It means the asset is carried in the books at an amount higher than the amount that can be recovered from its remaining service potential or sale.
For a non-cash-generating asset, the recoverable service amount is the higher of:
| Measure | Meaning |
|---|---|
| Fair value less costs to sell | The amount the entity could receive from selling the asset, after deducting selling costs |
| Value in use | The remaining service potential of the asset |
If the carrying amount is higher than the recoverable service amount, the asset is impaired.
Impairment loss = Carrying amount − Recoverable service amount
Non-Cash-Generating Assets
A non-cash-generating asset is mainly held to provide public service. Cash may sometimes be received, but the main purpose is not commercial return.
Examples include:
| Asset | Why IPSAS 21 applies |
|---|---|
| Public school building | Mainly provides education service |
| Public hospital ward providing free services | Mainly provides health service |
| Public library | Mainly provides public access to information |
| Public road with no toll charges | Mainly supports public movement |
| Ministry office building | Mainly supports administrative service delivery |
| Public service ICT system | Mainly supports service delivery |
Where the asset is mainly held to earn cash inflows and commercial return, IPSAS 26 is considered instead.
When to Test for Impairment
A public entity tests an asset for impairment when there is an indication that the asset may be impaired.
Common indicators include:
| Indicator | Example |
|---|---|
| Significant decline in demand | A public training facility is no longer used because programmes moved online |
| Obsolescence | An old ICT system is replaced by cheaper and more efficient technology |
| Physical damage | Fire, flooding or structural damage affects a public building |
| Change in use | A learning facility is closed and converted into a storage facility |
| Reduced service output | A machine still works but produces fewer units of service |
| Legal or policy change | Safety rules prevent part of a building from being used |
The key issue is whether the asset can still provide the level of service expected when the carrying amount was recorded.
Recoverable Service Amount
The recoverable service amount is the higher of:
- Fair value less costs to sell; and
- Value in use.
For non-cash-generating assets, value in use is not based on future cash flows. It is based on remaining service potential.
IPSAS 21 uses three main approaches to measure value in use:
| Situation in the question | Approach | Meaning |
|---|---|---|
| The asset is obsolete, underused, or its use has changed | Depreciated replacement cost | Replace the remaining service potential and depreciate it |
| The asset is physically damaged | Restoration cost | Start with the value if undamaged, then deduct the cost to restore |
| The asset still works but gives fewer service units | Service-units approach | Reduce the value based on the service still available |
The approach is selected from the facts of the question, not from the numbers.
Depreciated replacement cost deals with replacement. Restoration cost deals with damage. Service-units approach deals with reduced output or reduced capacity.
Approach 1: Depreciated Replacement Cost
Depreciated replacement cost is used where the asset is obsolete, underused, or now provides a different type of service.
The question asks: what would it cost today to replace the remaining service potential of the asset?
The steps are:
- Calculate the carrying amount of the old asset.
- Identify the replacement cost of the remaining service potential.
- Depreciate that replacement cost to reflect the age or used condition of the asset.
- Compare the carrying amount with the recoverable service amount.
- Recognise impairment if the carrying amount is higher.
Example 1: Underused Mainframe
A government ICT department bought a mainframe computer for CU10,000,000. The useful life was 7 years. After 4 years, most of the work moved to modern servers. The mainframe is still working, but it is now heavily underused. A machine that can provide the remaining service now costs CU500,000.
This is not physical damage. The issue is technological change and underuse. The depreciated replacement cost approach is used.
Step 1: Carrying Amount
| Item | CU |
|---|---|
| Cost | 10,000,000 |
| Less accumulated depreciation: 4/7 × 10,000,000 | (5,714,286) |
| Carrying amount | 4,285,714 |
Step 2: Recoverable Service Amount
| Item | CU |
|---|---|
| Replacement cost of remaining service | 500,000 |
| Depreciated replacement cost: 3/7 × 500,000 | 214,286 |
| Recoverable service amount | 214,286 |
Step 3: Impairment Loss
| Item | CU |
|---|---|
| Carrying amount | 4,285,714 |
| Recoverable service amount | (214,286) |
| Impairment loss | 4,071,428 |
The mainframe is still working, but that is not enough. The same remaining service can now be provided by a much cheaper machine. The carrying amount of CU4,285,714 is therefore not supported by the remaining service potential.
Example 2: Public Learning Facility Becomes a Warehouse
A public school authority constructed a learning facility for CU10,000,000. The useful life was 50 years. After 6 years, enrolment collapsed and the facility was closed. The building is now used only as a storage warehouse. A warehouse with the same storage capacity would cost CU4,200,000.
This is a change in use. The building is no longer providing learning services. It is now providing storage service.
Step 1: Carrying Amount
| Item | CU |
|---|---|
| Cost | 10,000,000 |
| Less accumulated depreciation: 6/50 × 10,000,000 | (1,200,000) |
| Carrying amount | 8,800,000 |
Step 2: Recoverable Service Amount
| Item | CU |
|---|---|
| Replacement cost of warehouse service | 4,200,000 |
| Depreciated replacement cost: 44/50 × 4,200,000 | 3,696,000 |
| Recoverable service amount | 3,696,000 |
Step 3: Impairment Loss
| Item | CU |
|---|---|
| Carrying amount | 8,800,000 |
| Recoverable service amount | (3,696,000) |
| Impairment loss | 5,104,000 |
The building has not disappeared, but the service has changed. It is no longer valued as a learning facility because it is not being used as one. The recoverable service amount is based on the storage service now being provided.
Approach 2: Restoration Cost
Restoration cost is used when the asset is physically damaged.
The question asks: what would the asset be worth if it was still in sound condition, and what cost is needed to restore it?
The steps are:
- Calculate the carrying amount of the damaged asset.
- Calculate the depreciated replacement cost of the asset as if it were undamaged.
- Deduct the restoration cost.
- The result is value in use.
- Compare with fair value less costs to sell, where provided.
- Recognise impairment if carrying amount is higher than recoverable service amount.
Example 3: Office Building Damaged by Fire
A public entity built an office building for CU50,000,000. The useful life was 40 years. After 19 years, fire caused serious structural damage. Repairs will cost CU35,500,000. A new similar office building would cost CU100,000,000.
This is physical damage. The restoration cost approach is used.
Step 1: Carrying Amount
| Item | CU |
|---|---|
| Cost | 50,000,000 |
| Less accumulated depreciation: 19/40 × 50,000,000 | (23,750,000) |
| Carrying amount | 26,250,000 |
Step 2: Depreciated Replacement Cost if Undamaged
| Item | CU |
|---|---|
| Replacement cost of new building | 100,000,000 |
| Less depreciation: 19/40 × 100,000,000 | (47,500,000) |
| DRC if undamaged | 52,500,000 |
Step 3: Deduct Restoration Cost
| Item | CU |
|---|---|
| DRC if undamaged | 52,500,000 |
| Less restoration cost | (35,500,000) |
| Recoverable service amount | 17,000,000 |
Step 4: Impairment Loss
| Item | CU |
|---|---|
| Carrying amount | 26,250,000 |
| Recoverable service amount | (17,000,000) |
| Impairment loss | 9,250,000 |
Journal Entry
Dr Impairment loss — surplus or deficit CU9,250,000
Cr Accumulated impairment / asset CU9,250,000
This is not a change in use. This is damage. The value in use is measured by taking the depreciated replacement cost of the building as if it was sound, then deducting the cost needed to restore it.
After the impairment, future depreciation is based on the new carrying amount of CU17,000,000 over the remaining useful life.
Approach 3: Service-Units Approach
The service-units approach is used where the asset still works, but its service output or capacity has reduced.
The question asks: how much of the original service capacity is still available?
The steps are:
- Calculate the carrying amount.
- Calculate depreciated replacement cost before the service reduction.
- Multiply by the remaining service units.
- Compare with fair value less costs to sell, where provided.
- Use the higher amount as recoverable service amount.
- Recognise impairment if carrying amount is higher.
Example 4: Public Office Tower Partly Closed
A public entity constructed a 20-storey office tower for CU80,000,000. The useful life is 40 years. After 15 years, new safety regulations require the top 4 floors to remain empty. Only 16 out of 20 floors can now be used. A similar 20-storey building costs CU85,000,000. Fair value less costs to sell is CU45,000,000.
The building is still working, but it is not giving full service. This is a service-units example.
Step 1: Carrying Amount
| Item | CU |
|---|---|
| Cost | 80,000,000 |
| Less depreciation: 15/40 × 80,000,000 | (30,000,000) |
| Carrying amount | 50,000,000 |
Step 2: DRC Before Service Adjustment
| Item | CU |
|---|---|
| Replacement cost of 20-storey building | 85,000,000 |
| Less depreciation: 15/40 × 85,000,000 | (31,875,000) |
| DRC before service-unit adjustment | 53,125,000 |
Step 3: Adjust for Remaining Service Units
| Item | CU |
|---|---|
| DRC before service-unit adjustment | 53,125,000 |
| Remaining service: 16/20 floors | 80% |
| Value in use | 42,500,000 |
Step 4: Higher of Two Amounts
| Item | CU |
|---|---|
| Value in use | 42,500,000 |
| Fair value less costs to sell | 45,000,000 |
| Recoverable service amount | 45,000,000 |
Step 5: Impairment Loss
| Item | CU |
|---|---|
| Carrying amount | 50,000,000 |
| Recoverable service amount | (45,000,000) |
| Impairment loss | 5,000,000 |
This answers the common question: why impair something that is still working? The tower is still working, but not fully. It was expected to provide 20 floors of service and can now provide only 16 floors. The carrying amount must therefore be tested against the reduced service potential.
Example 5: Printing Machine Underperforms
A national education department bought a printing machine for CU40,000,000. The useful life is 10 years. After 5 years, a fault reduces annual output by 25% for the rest of the machine’s life. A new machine costs CU45,000,000.
The machine is still working, but its output has fallen to 75%. This is a service-units example.
Step 1: Carrying Amount
| Item | CU |
|---|---|
| Cost | 40,000,000 |
| Less depreciation: 5/10 × 40,000,000 | (20,000,000) |
| Carrying amount | 20,000,000 |
Step 2: DRC Before Service Adjustment
| Item | CU |
|---|---|
| Replacement cost of new machine | 45,000,000 |
| Depreciated replacement cost: 5/10 × 45,000,000 | 22,500,000 |
Step 3: Adjust for Reduced Output
| Item | CU |
|---|---|
| Depreciated replacement cost | 22,500,000 |
| Remaining output capacity | 75% |
| Recoverable service amount | 16,875,000 |
Step 4: Impairment Loss
| Item | CU |
|---|---|
| Carrying amount | 20,000,000 |
| Recoverable service amount | (16,875,000) |
| Impairment loss | 3,125,000 |
The machine is not useless. It is still printing. But it is not printing at the level expected. The impairment is recognised because the service output has fallen significantly and is expected to remain lower.
Recognition of Impairment Loss
When impairment is identified, the asset is written down to its recoverable service amount.
The impairment loss is normally recognised in surplus or deficit.
Journal Entry
Dr Impairment loss — surplus or deficit
Cr Accumulated impairment / asset
After impairment, depreciation is recalculated based on the new carrying amount over the remaining useful life.
Reversal of Impairment
An impairment loss may be reversed if the conditions that caused the impairment improve.
Examples include:
| Earlier impairment cause | Possible reversal trigger |
|---|---|
| Demand collapsed | Demand returns |
| Asset was damaged | Asset is restored |
| Use was restricted | Restriction is removed |
| Output declined | Capacity improves |
The reversal cannot increase the asset above the carrying amount that would have existed if no impairment had been recognised.
When IPSAS 44 Takes Over
IPSAS 21 continues to apply where the asset is still being recovered through use.
If the public entity has genuinely committed to sell the asset, the asset is available for immediate sale, and the sale is highly probable, IPSAS 44 takes over.
Under IPSAS 44, the asset is measured at the lower of:
- Carrying amount; and
- Fair value less costs to sell.
Depreciation stops from the date the asset is classified as held for sale.
Chapter Summary
| Area | IPSAS 21 treatment |
|---|---|
| Type of asset | Non-cash-generating asset |
| Main purpose | Public service delivery |
| Main question | How much service potential remains? |
| Recoverable amount | Recoverable service amount |
| Higher of two amounts | Fair value less costs to sell and value in use |
| Value in use | Remaining service potential |
| Main approaches | DRC, restoration cost, service-units approach |
| Impairment loss | Carrying amount less recoverable service amount |
| Future depreciation | Based on new carrying amount |
| Reversal | Allowed, but capped |
| Held for sale | Move to IPSAS 44 if criteria are met |
Application Question
A public entity has a service delivery machine carried at CU30,000,000. The machine is still operating, but due to a permanent technical fault it can now provide only 60% of its original service capacity. A new similar machine costs CU50,000,000. The existing machine has used 4 years of its 10-year life. Fair value less costs to sell is CU24,000,000.
The issue is reduced service capacity. The service-units approach is used. First calculate the depreciated replacement cost of the full service potential, then reduce it to 60%, then compare that amount with fair value less costs to sell. The higher amount becomes the recoverable service amount. If the carrying amount is higher, the difference is impairment.
Key Lines to Remember
IPSAS 21 asks how much public service the asset can still provide.
A working asset can still be impaired if its service potential has fallen.
Depreciated replacement cost is used for obsolescence, underuse or change in use.
Restoration cost is used for physical damage.
Service-units approach is used when service output or capacity has reduced.
Recoverable service amount is the higher of fair value less costs to sell and value in use.
If the asset qualifies as held for sale, IPSAS 44 takes over.
