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Australia

IAS 36 impairment testing in Australia: AASB 136 Impairment of Assets (equivalent to IAS 36, with additional Australian-specific paragraphs for not-for-profit entities)

Australia adopted IFRS in 2005 and issues its accounting standards through the Australian Accounting Standards Board (AASB). AASB 136 Impairment of Assets is the Australian equivalent of IAS 36 and is word-for-word identical for for-profit entities. Where Australia differs is in its treatment of not-for-profit (NFP) and public sector entities. AASB 136 includes additional Australian paragraphs (prefixed "Aus") that modify the standard for NFP entities, most significantly by defining "recoverable amount" as the higher of fair value less costs of disposal and "value in use," where value in use for NFP assets held for their service potential can be estimated using depreciated replacement cost. This modification addresses the fundamental problem that many NFP assets don't generate cash inflows. For-profit Australian entities apply AASB 136 exactly as IAS 36 operates in Europe. Listed entities on the ASX must prepare IFRS-compliant financial statements, and unlisted entities that are reporting entities also apply full AASB standards. The AASB doesn't provide a simplified framework equivalent to the UK's FRS 102 or Dutch GAAP. This means even mid-market unlisted Australian companies that are reporting entities must perform full IAS 36 impairment testing, including the detailed VIU and disclosure requirements. Australia's economy is heavily weighted toward mining, financial services, and real estate, which creates sector-specific impairment patterns. Mining entities in particular generate a high volume of impairment testing work due to commodity price volatility and the capital-intensive nature of extraction assets.

Regulatory context: Australian Securities and Investments Commission (ASIC); Australian Prudential Regulation Authority (APRA) for financial institutions; Financial Reporting Council (FRC) and Auditing and Assurance Standards Board (AUASB)

ASIC has made impairment testing a recurring focus area in its annual financial reporting surveillance programme. ASIC Report 780 (December 2023) specifically addressed asset values and impairment, noting that entities should carefully consider the appropriateness of cash flow assumptions in the current economic environment. ASIC has also published regulatory guidance (RG 228) on prospective financial information, which, while not specific to IAS 36, sets expectations for the quality and reliability of projections used in impairment models. ASIC's findings have consistently highlighted that entities use over-optimistic cash flow projections, fail to update discount rates for current market conditions, and provide boilerplate sensitivity disclosures that don't meet AASB 136.134(f) requirements. The FRC (the Australian audit oversight body, distinct from the UK's FRC) and ASIC's audit inspection programme have both identified impairment as a key area of audit deficiency. ASIC's audit inspection findings for 2022-23 noted that auditors were not adequately challenging management's impairment models, particularly in the mining and energy sectors where commodity price assumptions drive the outcome. The AUASB has issued guidance notes on auditing accounting estimates that reference impairment testing as a complex estimate requiring specialist evaluation skills.

Practical guidance for Australia

Australian entities derive discount rates using Australian market inputs. The risk-free rate is based on Australian Commonwealth Government Bond (ACGB) yields, which are typically 50 to 150 basis points above US Treasuries and 100 to 200 basis points above German Bunds, reflecting Australia's smaller, more open economy. The equity risk premium for the Australian market is estimated at 6.0% to 7.0% based on long-run studies (the Australian evidence shows higher historical equity premiums than most European markets). For mining CGUs, the beta and specific risk adjustments can push the WACC to 10% to 14%, reflecting commodity price, exploration, and sovereign risk (for assets in developing countries). Australian companies typically prepare three-to-five-year business plans, though the planning horizon varies by sector. Mining companies often use "life of mine" plans extending 10 to 30 years, which can form the basis for an extended forecast period under AASB 136.33. The terminal growth rate should reflect Australia's long-term economic outlook: the Reserve Bank of Australia (RBA) targets 2% to 3% inflation, and real GDP growth has averaged approximately 2.5% over the past two decades. For Australian-dollar-denominated CGUs, a terminal growth rate of 2.0% to 2.5% is typical.

Audit expectations

ASIC audit inspectors look for evidence that the audit team independently assessed each key assumption. For mining entities, this means the auditor's own commodity price assumptions (benchmarked against analyst consensus, forward curves, and long-term price forecasts from sources like Wood Mackenzie or CRU), independent assessment of production volumes against the technical mine plan, and evaluation of operating cost assumptions against historical actuals. For non-mining entities, ASIC expects the same rigour applied to revenue growth, margins, and discount rates as European regulators do. ASIC has specifically noted that auditors should not delegate impairment testing evaluation entirely to valuation specialists without the engagement partner maintaining an understanding of the key judgments.

Australia-specific considerations

Australian tax law provides capital gains tax (CGT) discount and exemptions that affect FVLCOD calculations. For assets held more than 12 months, individuals and trusts receive a 50% CGT discount, and superannuation funds receive a 33.3% discount. Companies don't receive the CGT discount but may access rollover relief in certain restructuring scenarios. When calculating FVLCOD for a CGU, the tax cost on disposal depends on the specific tax position of the entity and the asset. Australia's mining-heavy economy creates specific impairment considerations. Mining entities must distinguish between exploration and evaluation assets (governed by AASB 6/IFRS 6), development assets, and production assets (governed by AASB 136). The transition from E&E to development triggers a mandatory impairment test. Rehabilitation and mine closure obligations (recognised as provisions under AASB 137) affect the carrying amount of the CGU and the cash flows used in VIU (closure costs are a cash outflow that must be included). The Australian Taxation Office (ATO) allows immediate deduction of exploration expenditure, creating differences between the tax and accounting bases of mining assets that affect deferred tax calculations under AASB 112.

Common inspection findings

Commodity price assumptions in mining VIU models exceeded analyst consensus without documented justification from the auditor (ASIC inspection 2023)

Discount rates were not updated for current market conditions, with some firms using rates from a period of materially different interest rates (ASIC inspection 2022)

Mine closure and rehabilitation costs were excluded from VIU cash flow projections, understating the cost component and overstating recoverable amount (ASIC inspection 2023)

Engagement partners delegated impairment testing evaluation to valuation specialists without maintaining an understanding of the key judgments (ASIC inspection 2022)

Sensitivity analysis disclosures failed to quantify the change in commodity price or discount rate that would trigger impairment (ASIC Report 780, 2023)