1 How to calculateRecoverable amount, Value in use, Fair value less cost of disposal. RecoverableAmount Recoverable amount of an assets is the greater of its fair value lesscost of disposal and its value in use. The concept of recoverable amount mainlyfocuses on the greatest value that can be obtained from the assets afterselling or using of it.
The recoverable amount is measured by following formulaas Recoverable amount = Fair Value – Cost of Disposal Recoverable amount = Value in Use Thecompanies need to record their carrying amount of assets if it exceeds the recoverableamount on balance sheet according to the accounting principles. For example, ifthe assets of the is impaired by any means or expected to be damaged, there hasto be formal estimation of the recoverable amount. IAS 36 states guidance forrecoverable amount as 1. If the fair valueless cost of use cant be calculated than the value in use is equal to therecoverable amount of asset.2. If the asset is tobe sold than the recoverable amount is calculated as fair value less cost ofuse.
If the fair value of an asset less costof disposal or value in use of asset seems to higher than the carrying amountof the assets then recoverable amount should not necessarily be calculated asthe assets is not really impaired. Valuein Use Value in use is present valueof future cash flows derived from the use of an asset. There has to bedetermination of assets value in use as part of a evaluation to see if there isimpairments on assets value. According to the IAS 36, VIU should reflect the present value of thefuture cash flows.
Normally on daily life present values are subject todetermined by traditional or expected cash flow approach. If there has been abelief that there is impairment on value of assets, companies are required toperform a formal estimation of the recoverable amount. IAs 36 also providesguidelines on as if the fair value of asset less than cost of disposal cant bedetermined the recoverable amount should be equal to its value in use. Thereare some factors like cash flows, Discount rate, and other things that needs tobe discussed while evaluating value in use. Cashflows should be considered for future derived from the use of asset and alsothe variation on time of cash flow.
Thediscount rate is another important factor to be considered. The discount rateis used to discount assets benefits for the company during the time. So, thetime value of money should be considered while evaluating value in use. Theother factor that could affect are liquidity and the ability to sell theassets. The cash flow estimation is normally based on supporting predictions,with recent forecasts as well as planned budgets. It can also been seen thatvalue 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.
Thevalue in use can be calculated as of Value in Use = Present Value of the assets benefits Fair value lesscost of disposal Fairvalue less cost of disposal consists of fair value and cost of disposal. Fairvalue is the price that would be received from sale of an assets or paid totransfer the liability between markets at the measurement date. Fair value lesscost to sell is the price that would be received by selling the assets less anycost required to make the sale of it. Fair value is determined I accordancewith the IFRS 13 fair value measurement. Cost of disposals are the direct addedcosts only as they don’t contain non existing costs and overheads. Thefollowing factors should be studied to calculate the fair value 1.
The certain assetsor liability as of subject to measurement.2. As of non financialasset the valuation is highest and best of use condition.3. As of measurement themost advantageous market for the assets and liabilities. As of measurement guidance, thecondition, location, any restriction on buy or sales of it should be studied.
Fair value measurement assumes an orderly transaction at measurement date betweenmarket parties. Fair value also considers valuation technique, the most popularof the techniques are as market approach, cost approach, income approach. Undermarket approach price and other relevant information generated by market and undercost approach the amount that would be required to replace the service capacityof an asset. And income approach deals with cash inflows or income and expensesto a discounted amount reflecting current market expectations about the futureamounts. But in some cases single valuation technique would be appropriate, whereasin others multiple valuation technique could be appropriate. IFRS 13 requires an entity discloseinformation that helps users as 1.
For assets andliabilities that are measured at fair value on certain basis after initialrecognition, with certain techniques used to develop those measurements.2. For fair valuemeasurements using significant unobservable inputs the effect of themeasurement on profit or loss or other comprehensive income for the givenperiod.
Theformula for fair value is Fairvalue = Recoverable amount + Cost of disposal Hence, the calculations of the fairvalue less cost of disposal, Recoverable amount and value in use can becalculated for an entity. ReferencesASICS v Healy (2011)( Centro case)https://www.money-zine.com/definitions/investing-dictionary/recoverable-amounts/Deegan, C 2010, Australian financialaccounting, 6th edn, Wiley, NSWhttps://www.iasplus.com/en/standards/ias/ias36