1 How to calculate
Recoverable amount, Value in use, Fair value less cost of disposal.
Recoverable amount of an assets is the greater of its fair value less
cost of disposal and its value in use. The concept of recoverable amount mainly
focuses on the greatest value that can be obtained from the assets after
selling or using of it. The recoverable amount is measured by following formula
Recoverable amount = Fair Value – Cost of Disposal
Recoverable amount = Value in Use
companies need to record their carrying amount of assets if it exceeds the recoverable
amount on balance sheet according to the accounting principles. For example, if
the assets of the is impaired by any means or expected to be damaged, there has
to be formal estimation of the recoverable amount. IAS 36 states guidance for
recoverable amount as
1. If the fair value
less cost of use cant be calculated than the value in use is equal to the
recoverable amount of asset.
2. If the asset is to
be sold than the recoverable amount is calculated as fair value less cost of
If the fair value of an asset less cost
of disposal or value in use of asset seems to higher than the carrying amount
of the assets then recoverable amount should not necessarily be calculated as
the assets is not really impaired.
Value in use is present value
of future cash flows derived from the use of an asset. There has to be
determination of assets value in use as part of a evaluation to see if there is
impairments on assets value.
According to the IAS 36, VIU should reflect the present value of the
future cash flows. Normally on daily life present values are subject to
determined by traditional or expected cash flow approach. If there has been a
belief that there is impairment on value of assets, companies are required to
perform a formal estimation of the recoverable amount. IAs 36 also provides
guidelines on as if the fair value of asset less than cost of disposal cant be
determined the recoverable amount should be equal to its value in use. There
are some factors like cash flows, Discount rate, and other things that needs to
be discussed while evaluating value in use.
flows should be considered for future derived from the use of asset and also
the variation on time of cash flow. The
discount rate is another important factor to be considered. The discount rate
is used to discount assets benefits for the company during the time. So, the
time value of money should be considered while evaluating value in use. The
other factor that could affect are liquidity and the ability to sell the
assets. The cash flow estimation is normally based on supporting predictions,
with recent forecasts as well as planned budgets. It can also been seen that
value in use is normally estimated as of ‘ less than the highest and best use’
of the assets. So the value is normally lower than its market value.
value in use can be calculated as of
Value in Use = Present Value of the assets benefits
Fair value less
cost of disposal
value less cost of disposal consists of fair value and cost of disposal. Fair
value is the price that would be received from sale of an assets or paid to
transfer the liability between markets at the measurement date. Fair value less
cost to sell is the price that would be received by selling the assets less any
cost required to make the sale of it. Fair value is determined I accordance
with the IFRS 13 fair value measurement. Cost of disposals are the direct added
costs only as they don’t contain non existing costs and overheads. The
following factors should be studied to calculate the fair value
1. The certain assets
or liability as of subject to measurement.
2. As of non financial
asset the valuation is highest and best of use condition.
3. As of measurement the
most advantageous market for the assets and liabilities.
As of measurement guidance, the
condition, location, any restriction on buy or sales of it should be studied.
Fair value measurement assumes an orderly transaction at measurement date between
market parties. Fair value also considers valuation technique, the most popular
of the techniques are as market approach, cost approach, income approach. Under
market approach price and other relevant information generated by market and under
cost approach the amount that would be required to replace the service capacity
of an asset. And income approach deals with cash inflows or income and expenses
to a discounted amount reflecting current market expectations about the future
amounts. But in some cases single valuation technique would be appropriate, whereas
in others multiple valuation technique could be appropriate.
IFRS 13 requires an entity disclose
information that helps users as
1. For assets and
liabilities that are measured at fair value on certain basis after initial
recognition, with certain techniques used to develop those measurements.
2. For fair value
measurements using significant unobservable inputs the effect of the
measurement on profit or loss or other comprehensive income for the given
formula for fair value is
value = Recoverable amount + Cost of disposal
Hence, the calculations of the fair
value less cost of disposal, Recoverable amount and value in use can be
calculated for an entity.
ASICS v Healy (2011)( Centro case)
Deegan, C 2010, Australian financial
accounting, 6th edn, Wiley, NSW