Financial Reporting · Impairment of assets

Recoverable Amount: Fair Value Less Costs of Disposal and Value in Use

Updated 11 October 2026 · Fact-checked

Recoverable amount is the higher of an asset's fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows the asset is expected to generate. Compare recoverable amount with carrying amount. If carrying amount is higher, the asset is impaired.

Understand Recoverable Amount: Fair Value Less Costs of Disposal and Value in Use

IAS 36 says an asset must not be carried at more than it can recover. To test this, you compare the carrying amount with the recoverable amount.

Recoverable amount is the higher of two figures. The logic is simple. A rational owner would either sell the asset or keep using it, and would choose whichever gives more. So the asset is worth at least the better of the two routes.

Fair value less costs of disposal (FVLCD) is the price you would get in an orderly sale between market participants (the IFRS 13 idea of fair value), minus the direct costs of selling. Costs of disposal include legal fees, transfer taxes and costs of getting the asset ready for sale. They do not include finance costs, income tax expense or reorganisation costs after the sale.

Value in use (VIU) is the present value of the future cash flows you expect the asset to produce from continuing use, plus the cash flow from its final disposal at the end of its life. You discount these cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset.

You do not always need to calculate both. If either figure is higher than the carrying amount, the asset is not impaired and you can stop. If FVLCD cannot be measured reliably, or if VIU is thought to be close to FVLCD, you may use VIU alone. Recoverable amount is also never negative as a concept: the impairment loss is capped by writing the asset down to recoverable amount.

Key rules to remember

Recoverable amount: Recoverable amount = higher of (FVLCD, VIU); Compare this with carrying amount. Impairment exists only if carrying amount is higher.
Fair value less costs of disposal: FVLCD = fair value − costs of disposal; Costs of disposal are direct incremental selling costs. Exclude finance costs and tax expense.
Value in use: VIU = Σ [cash flow in year t ÷ (1 + r)^t], including final disposal proceeds; r is a pre-tax discount rate. Use cash flows for the asset in its current condition.
Impairment loss: Impairment loss = carrying amount − recoverable amount (if positive); Recognise in profit or loss, unless the asset is revalued, when it first goes against any revaluation surplus on that asset.
Cash flow rules for VIU: Include: cash inflows from use, cash outflows needed to generate them, net disposal proceeds. Exclude: financing cash flows, tax payments, uncommitted restructuring, enhancement of performance.; Base cash flows on reasonable, supportable assumptions and the most recent approved budgets, normally covering a maximum of five years unless a longer period is justified.

How to solve Recoverable Amount: Fair Value Less Costs of Disposal and Value in Use questions

Use this order for any recoverable amount question. It saves time because you often stop early.

1Find the carrying amount of the asset or cash-generating unit at the test date, after depreciation to that date.
2Identify fair value and the costs of disposal. Compute FVLCD = fair value − costs of disposal.
3Compare FVLCD with carrying amount. If FVLCD is higher, there is no impairment and you can stop.
4If not, build the VIU cash flows. Strip out financing flows, tax payments, uncommitted restructuring and future enhancements. Add the net disposal proceeds in the final year.
5Discount the cash flows using the pre-tax rate given. Use the discount factors in the question or apply 1 ÷ (1 + r)^t.
6Recoverable amount is the higher of FVLCD and VIU. Impairment loss = carrying amount − recoverable amount if positive.
7Post the entry: Dr Impairment loss (profit or loss, or revaluation surplus first), Cr Asset (or accumulated impairment). Restate future depreciation on the new carrying amount.

Quickest way: Stop-early method

When to use it: Use in objective test questions where you are given both figures or can see that one is clearly above carrying amount.

Write carrying amount, FVLCD and VIU in a row.
If any one figure is at least the carrying amount, there is no impairment.
If both are below, the larger one is recoverable amount.
Loss = carrying amount − the larger figure.
Check you subtracted disposal costs from fair value and did not discount twice.

Common mistakes in Recoverable Amount: Fair Value Less Costs of Disposal and Value in Use

Using the lower of FVLCD and VIU as recoverable amount.
Students link impairment with prudence and assume the cautious figure is used.
Fix: Recoverable amount is always the higher. Say 'higher' out loud when you read the question.
Forgetting to deduct costs of disposal from fair value.
The question gives a market price and students treat it as the final figure.
Fix: Underline any selling costs in the scenario and subtract them. Label the result FVLCD.
Including financing cash flows, tax payments or future restructuring in VIU.
Students take all cash items from the budget without screening them.
Fix: Cross out interest, tax and uncommitted restructuring. Also exclude cash flows from enhancing the asset beyond its current performance.
Using a post-tax discount rate.
Students recall that the cost of capital is usually quoted after tax.
Fix: IAS 36 requires a pre-tax rate. Use the rate given in the question and do not adjust it unless told to.
Measuring impairment against the wrong carrying amount, such as cost instead of depreciated amount.
Students skip the depreciation up to the test date.
Fix: Always roll the asset forward to the date of the test before comparing.
Forgetting to include final disposal proceeds in VIU.
Students focus on the yearly operating cash flows.
Fix: Check the final year for scrap or residual value and add it as a cash inflow.

Worked examples

Example 1

At 31 December 20X5 a machine has a carrying amount of ₹48,00,000. A buyer would pay ₹46,00,000 in an orderly sale, and selling costs would be ₹1,00,000. The machine will generate net cash flows of ₹20,00,000 in 20X6 and ₹22,00,000 in 20X7, and then be scrapped for nil. The pre-tax discount rate is 10%. Calculate the impairment loss.

Show the solution

FVLCD = ₹46,00,000 − ₹1,00,000 = ₹45,00,000.
FVLCD is below the carrying amount of ₹48,00,000, so calculate VIU.
Discount factors at 10%: year 1 = 0.909, year 2 = 0.826.
Year 1: ₹20,00,000 × 0.909 = ₹18,18,000.
Year 2: ₹22,00,000 × 0.826 = ₹18,17,200.
VIU = ₹18,18,000 + ₹18,17,200 = ₹36,35,200.
Recoverable amount = higher of ₹45,00,000 and ₹36,35,200 = ₹45,00,000.
Impairment loss = ₹48,00,000 − ₹45,00,000 = ₹3,00,000.

Answer: Recoverable amount is ₹45,00,000 (FVLCD). The impairment loss is ₹3,00,000.

Example 2

An asset has a carrying amount of $600,000. Its fair value is $520,000 with disposal costs of $20,000. Budgeted cash flows are: year 1 $200,000, year 2 $250,000, year 3 $180,000. The year 3 figure includes $30,000 of expected scrap proceeds. In year 2 the budget also includes $40,000 of cash inflow from a restructuring the company has not yet committed to, which is already included in the $250,000. The pre-tax rate is 8%. Factors: year 1 0.926, year 2 0.857, year 3 0.794. Calculate the impairment loss.

Show the solution

FVLCD = $520,000 − $20,000 = $500,000. This is below $600,000, so calculate VIU.
Remove the uncommitted restructuring benefit: year 2 = $250,000 − $40,000 = $210,000.
Keep the scrap proceeds, because they are part of final disposal cash flow in year 3 ($180,000).
Year 1: $200,000 × 0.926 = $185,200.
Year 2: $210,000 × 0.857 = $179,970.
Year 3: $180,000 × 0.794 = $142,920.
VIU = $185,200 + $179,970 + $142,920 = $508,090.
Recoverable amount = higher of $500,000 and $508,090 = $508,090.
Impairment loss = $600,000 − $508,090 = $91,910.

Answer: Recoverable amount is $508,090 (VIU). The impairment loss is $91,910.

Exam tips

In objective test questions, check first whether FVLCD already exceeds carrying amount. If so, you can answer without any discounting.
Read the cash flow list line by line and cross out interest, tax and uncommitted restructuring before you discount anything.
Show FVLCD, VIU, recoverable amount and loss as four labelled lines in a constructed response answer. Markers award method marks for each.
If the question gives post-tax and pre-tax rates, use the pre-tax rate for VIU.
Remember that the asset may be revalued. A loss on a revalued asset goes first against its revaluation surplus, then to profit or loss.

Practice questions from Impairment of assets

Recoverable Amount: Fair Value Less Costs of Disposal and Value in Use in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Recoverable Amount: Fair Value Less Costs of Disposal and Value in Use: frequently asked questions

What is the difference between fair value less costs of disposal and value in use?

FVLCD is what you would get by selling the asset now, net of selling costs. Value in use is the present value of the cash flows you expect from keeping and using it. Recoverable amount is the higher of the two.

Do I always need to calculate both FVLCD and value in use?

No. If either one is higher than the carrying amount, the asset is not impaired and you can stop. You only need both when the first one you calculate is below carrying amount.

Why is a pre-tax discount rate used for value in use?

IAS 36 requires VIU cash flows to be pre-tax, so the rate must also be pre-tax to be consistent. In ACCA FR questions you are normally given the rate to use.

Can future restructuring be included in value in use?

Only if the entity has already committed to it in line with the IAS 37 rules. Cash flows from uncommitted restructuring, or from improving the asset's performance, are excluded.