Home Articles GRAP 21 defines non-cash-generating assets for assessing impairment

GRAP 21 defines non-cash-generating assets for assessing impairment


Recent reports by the Auditor-General of South Africa state that there are municipalities that fail to timeously submit financial statements for audit purposes.

Without dwelling much on the reasons for such failures, it is public knowledge that these municipalities rely significantly on the support of external service providers to compile and submit annual financial statements. The Accounting Standards Board (ASB) develops standards of Generally Recognised Accounting Practices (GRAP) taking into consideration the standards issued by International Public Sector Accounting Standards Board (IPSASB) and where relevant the International Accounting Standards Board (IASB).

The ASB regularly reviews and updates the standards of GRAP taking into account changes in other standards, setting bodies and any other specific transactions that may be relevant to the South African environment. These changes require municipalities to keep abreast of new developments, and this may be difficult taking into account the struggle to implement basic financial management principles as described above.

The ASB introduced six new GRAP standards in the GRAP Reporting Framework for financial years beginning on or after 1 April 2012, and they include the following:

• GRAP 21 – Impairment of Non-cash-generating Assets

• GRAP 23 – Revenue from Non-exchange Transactions (Taxes and Transfers)

• GRAP 24 – Presentation of Budget Information in the Financial Statements

• GRAP 26 – Impairment of Cash-generating Assets

• GRAP 103 – Heritage Assets

• GRAP 104 – Financial Instruments.

In our view only three of the six standards introduce new policy requirements that are different from the way in which they were accounted for previously, namely, heritage assets, impairment of non-cash generating assets, and presentation of budget information. This paper focuses on the practical accounting implications for defining a non-cash generating asset per the recently issued standard on Impairment of Non-cash-generating Assets, GRAP 21.

GRAP 21 defines cash-generating assets as all assets held by the entity with the primary objective to generate commercial return, and non-cash generating assets as those assets other than cash generating assets. Before the development of GRAP 21 by the ASB, public sector institutions were using International Accounting Standards (IAS 36) to report on impairments of non-monetary assets. As IAS 36 is meant for private sector entities, it relates to cash generating assets and units. The ASB’s view was that IAS 36 fails to address the fact that the majority of assets in the public sector are used for service delivery and might not necessarily generate cash flows and profits. The latter influenced the development of the public sector equivalent of IAS 36, by separating it into two impairment standards, GRAP 21 and GRAP 26, which deal with impairment non-cash-generating assets and cash-generating assets respectively.

Subsequent to recent separate awareness sessions by the ASB and NT on the requirements of GRAP 21, there are some municipalities that have a strong view that they exist to deliver services to their communities, and therefore all their assets should be assessed for impairment under GRAP 21. This approach to defining non-cash-generating assets is problematic in a principled-based standard setting environment, and it may lead to interpretation issues unless the standard is applied to individual specific circumstances.

In our application of the definition set out in the standard, it is understandable that practitioners may conclude that all municipal assets are non-cash generating, especially by the specific requirement that assets will only be cash-generating if their primary objective is to generate a commercial return. It is however not desirable to generalise that all assets in

a public sector that has a mandate to deliver services are non-cash-generating.

In clarifying which assets of a municipality are non-cash-generating, the standard provides further explanations of when an entity is considered to hold assets with the primary objective of generating commercial return as follows: “an asset generates a commercial return when it is deployed in the manner consistent with that adopted by a profit oriented entity.”

Assessment level

The statement above clarifies that the assessment of whether an asset is cash-generating or not must be performed at an asset level, rather than at an entity level. This is particularly important to avoid accounting treatments that are not informed by the underlying circumstances that are applicable to an asset. We are of the view that an argument that a municipality exists to deliver services to their communities, and not to generate commercial return, is not a consideration when assessing whether a specific asset is non-cash-generating.

Asset is deployed in a manner consistent with that adopted by a profit-oriented entity: Municipalities must consider the manner in which their assets are managed to determine whether their asset management practices are consistent with those in the profit-driven private sector. In a profit-driven environment, assets are deployed with an objective to maximise returns for the owners.

It is therefore expected that where an asset deployed does not yield the profits that management and shareowners have set, these assets are likely to be sold. On the other hand, the decision of whether to continue deploying an asset that is delivering a service will not primarily be driven by its ability to meet returns expectations, but service delivery objectives are considered key to making this decision.

It is also important to note that the new standard highlights that an institution that holds an asset to generate a “commercial return”, i.e. a cash generating- asset, intends to generate positive cash inflows from that asset and earn a return that reflects the risks involved in holding such an asset.

Based on the discussion above, it is concluded that the definition of a cash-generating-asset per GRAP 21 requires officials to apply judgement on individual assets that they manage, whether electricity infrastructure assets, water assets, buildings or others, to determine whether the standard is applicable. The municipality will be expected to document their evaluation criteria and the decision they reached based on applied judgements to enable an independent review of that process. An entity develops criteria so that it can exercise that judgement consistently in accordance with the definition of noncash-generating assets.

The ASB states that given the overall objectives of most entities, “the presumption is that assets are non-cash-generating”, however, municipalities must document their thought process. Like any other new standard, we expect that a few interpretation issues may arise during the 2013 audit process. Inconsistencies that surface will be dealt with in a comprehensive principle-based manner which takes into account the views of all relevant stakeholders.

In the 2013 improvements to the standards of GRAP (ASB: ED 112), the ASB included a discussion on impairment of non-cash-generating assets, to address some of the confusion that might be caused by the new standard. We encourage practitioners to review the document and its contents to assess whether any outstanding issues have not been addressed by the proposed amendments, and to provide comments to the ASB within the set timeframe; the closing date is 30 September 2013. ❐


• Accounting Standards Board, Exposure Draft 112 – Improvements to the standards of GRAP (2013) : http://download2.asb.co.za/eds/ed112/ED%20112%20ITC%20on%20Proposed%20Improvements%20to%20Standards%20of%20GRAP%20(2013).pdf

• Accounting Standards Board, GRAP 21 – Impairment of non-cash-generating assets: http://download.asb.co.za/download/GRAP%2021%20Impairment%20of%20Non-cash-generating%20assets%20(March%202009).pdf

Author: Kwena Mokgokong CA(SA) is the Director: Accounting Support and Reporting – Local Government, National Treasury.