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C5 Impairment of non-financial assets

Recognition and measurement
Tangible and intangible assets are measured using the cost basis and are written down to their recoverable amount where their carrying value exceeds the recoverable amount.

Intangible assets that are not yet subject to amortisation are tested on an annual basis for impairment, or where an indication of impairment exists. Property, plant and equipment and intangible assets subject to amortisation are reviewed for impairment wherever events or changes in circumstances indicate that the carrying amount may not be recoverable.

The recoverable amount of an asset is the higher of its fair value less costs of disposal or its value in use. Any reduction in the carrying value is recognised as an expense in profit or loss in the reporting period in which the impairment loss occurs.

For assets that do not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit (CGU) to which that asset belongs. The Group’s CGU is determined according to the lowest level of aggregation for which the cash inflows are independent of cash inflows from other assets.

The Group has determined that assets which form part of the nbn™ access network, work together to achieve the delivery of products and services in order to generate cash inflows. As a result, the Group has determined that the ubiquitous broadband network is a single CGU (the NBN Co CGU).

Impairment test
At the end of the reporting period, the Group performed an impairment test using fair value less costs of disposal. NBN Co has determined fair value less costs of disposal by reference to the depreciated replacement cost of the assets given there is no active market for the nbn™ access network assets. As part of assessing the depreciated replacement cost of the assets, NBN Co has considered the risks of both technological and economic obsolescence.

As a result of this test and consistent with prior periods, it has been determined that the recoverable amount of the NBN Co CGU is not less than its carrying amount as at 30 June 2019.

Key estimates and judgements:

Determination of fair value less costs of disposal when considering impairment
In performing the impairment test, the Group estimated the depreciated replacement cost (DRC) of the assets within the NBN Co CGU. DRC is an estimate of what it would cost to acquire or construct a substitute national broadband network, on a like for like basis, to the stage of current completion, adjusted for any functional or technological obsolescence of the existing assets. In determining DRC, the Group considers the cost of recently constructed assets, current purchase prices and the current estimates of cost at completion of assets under construction.

The final step of the DRC approach is to assess the risk of economic obsolescence. This assessment is required to confirm that the assets are capable of generating an economic return for NBN Co. The test involves estimating the present value of the expected cash flows of the CGU and performing sensitivity analysis over future revenue, capital and operating expenditure expectations using a reasonable range of discount rates. Following the completion of this assessment, consistent with previous years, the results of the economic obsolescence test support the DRC estimate of the assets.