Financial Reporting · Ind AS 36 Impairment of Assets

Ind AS 36: Measuring Recoverable Amount and Value in Use

Updated 5 October 2026 · Fact-checked

Recoverable amount under Ind AS 36 is the higher of fair value less costs of disposal and value in use. Value in use is the present value of future cash flows from continuing use and final disposal, discounted at a pre-tax rate. Compare recoverable amount with carrying amount; any shortfall is the impairment loss.

Understand Measuring Recoverable Amount and Value in Use

An asset is impaired when its carrying amount is more than the amount you can recover from it. Ind AS 36 calls that amount the recoverable amount. It is the higher of two numbers: fair value less costs of disposal (FVLCD) and value in use (VIU). The logic is simple. A rational entity would either sell the asset or keep using it, whichever gives more.

FVLCD is the price you would get in an orderly transaction between market participants, measured as per Ind AS 113, minus the direct costs of selling. Costs of disposal include legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to make it ready for sale. They do not include termination benefits or costs of reducing or reorganising the business.

Value in use is the present value of the future cash flows you expect from the asset (or cash-generating unit) while using it, plus the net cash from its disposal at the end of its life. You estimate the cash flows, then discount them. Cash flows must be based on reasonable and supportable assumptions, with more weight on external evidence. They should rest on the most recent budgets or forecasts approved by management, normally covering a maximum of five years unless a longer period can be justified. Beyond that period, you extrapolate using a steady or declining growth rate. Do not use a rising rate unless you can justify it, and do not exceed the long-term average growth rate for the product, industry or country unless a higher rate is justified.

The cash flows must be for the asset in its current condition. Exclude cash flows from a future restructuring you are not yet committed to, and from future capex that improves or enhances the asset's performance. Also exclude financing cash flows (such as interest and loan repayments) and income tax receipts or payments. Financing is captured in the discount rate, and tax is handled by using a pre-tax rate.

The discount rate is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset, for which the cash flow estimates have not already been adjusted. If an asset-specific rate is not available in the market, you can start from surrogates such as the entity's weighted average cost of capital, its incremental borrowing rate, or other market borrowing rates, and adjust them. You do not always need both measures. If either FVLCD or VIU is more than the carrying amount, the asset is not impaired and you can stop.

Key rules to remember

Recoverable amount: Recoverable amount = Higher of (FVLCD, Value in use); If either amount exceeds the carrying amount, there is no impairment and the other need not be computed.
Fair value less costs of disposal: FVLCD = Fair value (Ind AS 113) − Costs of disposal; Costs of disposal are direct selling costs. Termination benefits and reorganisation costs are excluded.
Value in use: VIU = Σ [Net cash flow in year t ÷ (1 + r)^t], including net disposal proceeds in the final year; r is a pre-tax discount rate. Use cash flows before financing and tax.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount (only if carrying amount is higher); Recognised immediately in profit or loss for an asset carried at cost. For a revalued asset, it is treated as a revaluation decrease.
Cash flow projection period: Detailed forecast: up to 5 years, then extrapolate with a steady or declining growth rate; A longer period needs justification. Growth should not exceed the long-term average for the product, industry or country unless justified.

How to solve Measuring Recoverable Amount and Value in Use questions

Use this order for any recoverable amount question. It keeps your working clean and shows the examiner each step.

1Note the carrying amount of the asset or CGU at the date of testing (after depreciation to date).
2Check whether FVLCD alone is above the carrying amount. If yes, state that there is no impairment and stop. Otherwise compute both.
3Compute FVLCD: fair value as per Ind AS 113 less direct costs of disposal.
4List the cash flows for value in use. Include inflows from continuing use, necessary outflows, and net disposal proceeds at the end of life.
5Remove items that do not belong: financing flows, income tax, uncommitted restructuring and future enhancement capex. State the reason for each removal.
6Discount each year's cash flow using the pre-tax rate given and add them up to get VIU.
7Take the higher of FVLCD and VIU as recoverable amount. Compare it with the carrying amount.
8Write the impairment loss, the journal entry (Impairment loss A/c Dr, Asset or accumulated impairment A/c Cr) and a one-line conclusion.

Quickest way: Screen first, then discount

When to use it: Use this when the question gives both fair value data and a cash flow table and you have limited time.

Compute FVLCD first because it is a one-line subtraction.
If FVLCD is already above the carrying amount, write 'no impairment' and skip the discounting.
Otherwise strike out financing and tax items in the cash flow table before you calculate anything.
Add the disposal proceeds to the last year's cash flow so you do only one discounting line per year.
Multiply by the given factors, add, and compare the total with FVLCD. Take the higher.
Subtract from the carrying amount only if the carrying amount is higher.

Common mistakes in Measuring Recoverable Amount and Value in Use

Including interest on loans and income tax paid in the cash flows used for value in use.
The cash flow table in the question looks like a complete cash budget, so students use it as given.
Fix: Remove financing and tax flows. Financing effects sit in the discount rate, and tax is excluded because the rate is pre-tax.
Including future capex that will enhance capacity, along with the extra cash flows it brings.
Students treat the forecast as the best estimate of future profits and forget that the test is on the asset in its current condition.
Fix: Exclude improvement or enhancement capex and its benefits. Maintenance capex needed to keep the asset's current standard of performance stays in.
Using the lower of FVLCD and VIU as recoverable amount.
Students link impairment with prudence and assume the lower number is safer.
Fix: Recoverable amount is always the higher of the two. Writing 'higher' in your formula line helps you remember it.
Forgetting the net disposal proceeds at the end of the asset's useful life in value in use.
Students focus on the yearly operating cash flows and treat the disposal as outside 'use'.
Fix: Add the expected net amount from disposal at the end of life to the final year's cash flow before discounting.
Not deducting costs of disposal from fair value, or deducting items that do not qualify.
Students confuse fair value with FVLCD, or deduct termination benefits and reorganisation costs.
Fix: Deduct only direct incremental costs of selling, such as legal costs, stamp duty and removal costs. Say 'FVLCD' only after the deduction.
Using a post-tax discount rate on pre-tax cash flows, or using a rate that does not match the cash flows.
Students pick the only rate given, such as the cost of capital, without reading whether it is pre-tax.
Fix: Ind AS 36 requires a pre-tax rate. If the question gives only a post-tax rate, state that it must be adjusted to a pre-tax rate. Use the figures the question provides.

Worked examples

Example 1

Alpha Ltd tests a machine for impairment at the reporting date. Carrying amount: ₹50,00,000. Expected net cash flows from continuing use: Year 1 ₹12,00,000; Year 2 ₹14,00,000; Year 3 ₹15,00,000; Year 4 ₹13,00,000; Year 5 ₹10,00,000. Net disposal proceeds at the end of Year 5: ₹4,00,000. Pre-tax discount rate: 10%. Present value factors at 10%: 0.9091, 0.8264, 0.7513, 0.6830, 0.6209. A market participant would pay ₹46,00,000 for the machine, and disposal costs would be ₹1,00,000. Is the machine impaired?

Show the solution

FVLCD = ₹46,00,000 − ₹1,00,000 = ₹45,00,000. This is below the carrying amount of ₹50,00,000, so compute VIU.
Year 5 cash flow for discounting = ₹10,00,000 + ₹4,00,000 = ₹14,00,000.
PV of Year 1 = ₹12,00,000 × 0.9091 = ₹10,90,920.
PV of Year 2 = ₹14,00,000 × 0.8264 = ₹11,56,960.
PV of Year 3 = ₹15,00,000 × 0.7513 = ₹11,26,950.
PV of Year 4 = ₹13,00,000 × 0.6830 = ₹8,87,900.
PV of Year 5 = ₹14,00,000 × 0.6209 = ₹8,69,260.
VIU = ₹10,90,920 + ₹11,56,960 + ₹11,26,950 + ₹8,87,900 + ₹8,69,260 = ₹51,31,990.
Recoverable amount = higher of ₹45,00,000 and ₹51,31,990 = ₹51,31,990.
Recoverable amount is more than the carrying amount of ₹50,00,000.

Answer: Recoverable amount is ₹51,31,990 (value in use), which is above the carrying amount of ₹50,00,000. The machine is not impaired and no impairment loss is recognised.

Example 2

Beta Ltd has a plant with a carrying amount of ₹80,00,000 and a remaining life of 3 years. Management's forecast shows net operating cash flows of ₹20,00,000, ₹22,00,000 and ₹24,00,000 in Years 1 to 3. The forecast also shows: interest on the plant loan of ₹4,00,000 each year; income tax payments of ₹3,00,000 each year; and a planned capacity-enhancing upgrade in Year 2 costing ₹10,00,000, with extra cash inflows of ₹8,00,000 in Year 3. Net disposal proceeds at the end of Year 3 are ₹30,00,000. The pre-tax discount rate is 12%, with factors of 0.8929, 0.7972 and 0.7118. Fair value of the plant is ₹70,00,000 and disposal costs are ₹2,00,000. Compute the impairment loss, if any.

Show the solution

Exclude interest (financing), income tax payments, the upgrade cost and the extra inflows from the upgrade. Ind AS 36 does not allow these in value in use for the asset in its current condition.
Cash flows to use: Year 1 ₹20,00,000; Year 2 ₹22,00,000; Year 3 ₹24,00,000 + ₹30,00,000 = ₹54,00,000.
PV of Year 1 = ₹20,00,000 × 0.8929 = ₹17,85,800.
PV of Year 2 = ₹22,00,000 × 0.7972 = ₹17,53,840.
PV of Year 3 = ₹54,00,000 × 0.7118 = ₹38,43,720.
VIU = ₹17,85,800 + ₹17,53,840 + ₹38,43,720 = ₹73,83,360.
FVLCD = ₹70,00,000 − ₹2,00,000 = ₹68,00,000.
Recoverable amount = higher of ₹73,83,360 and ₹68,00,000 = ₹73,83,360.
Impairment loss = ₹80,00,000 − ₹73,83,360 = ₹6,16,640.

Answer: The recoverable amount is ₹73,83,360 (value in use). The impairment loss is ₹6,16,640, recognised immediately in profit or loss (Impairment loss A/c Dr ₹6,16,640; Plant A/c or accumulated impairment Cr ₹6,16,640), assuming the plant is carried at cost.

Exam tips

Write the formula line 'Recoverable amount = higher of FVLCD and VIU' at the start. It earns marks even if your arithmetic slips.
Show a short list of excluded items (financing, tax, uncommitted restructuring, enhancement capex) with one-line reasons. Examiners look for this in case scenarios.
In MCQs, check first whether FVLCD already exceeds the carrying amount. If it does, the answer is 'no impairment' and you save time.
Use the discount factors given in the question. Do not recompute them, and keep the working in a table with year, cash flow, factor and present value.
In theory questions on the discount rate, name the three points: it is pre-tax, it reflects time value and asset-specific risks, and surrogates such as WACC or incremental borrowing rate can be the starting point.

Practice questions from Ind AS 36 Impairment of Assets

Measuring Recoverable Amount 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.

Measuring Recoverable Amount 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 in an orderly market transaction, measured under Ind AS 113, less direct selling costs. Value in use is the present value of cash flows you expect from using the asset and disposing of it at the end of its life. Recoverable amount is the higher of the two.

Why does Ind AS 36 use a pre-tax discount rate?

The cash flows for value in use are estimated before income tax, so the discount rate must also be pre-tax to be consistent. The rate reflects current market assessments of time value and asset-specific risks. If you start from a post-tax rate, it has to be adjusted to a pre-tax rate.

Do I have to calculate both FVLCD and value in use every time?

No. If either amount is higher than the carrying amount, the asset is not impaired and you need not compute the other. Also, if FVLCD cannot be measured because there is no basis for a reliable estimate, you can use value in use as the recoverable amount.

How many years of cash flow projections can I use?

Projections should be based on the most recent budgets or forecasts approved by management, normally covering a maximum of five years unless a longer period can be justified. Cash flows beyond that period are extrapolated using a steady or declining growth rate, unless an increasing rate can be justified.