Advanced Accounting · AS 28 Impairment of Assets

Measuring Recoverable Amount: Net Selling Price and Value in Use

Updated 4 October 2026 · Fact-checked

Recoverable amount under AS 28 is the higher of an asset's net selling price and its value in use. Net selling price is selling price less disposal costs. Value in use is the present value of estimated future cash flows from using the asset and disposing of it at the end, discounted at a pre-tax rate.

Understand Measuring Recoverable Amount: Net Selling Price and Value in Use

AS 28 asks one question at each reporting date where an asset may be impaired: can the business recover the carrying amount of the asset? To answer, it compares the carrying amount with the recoverable amount.

A business can recover value in two ways. It can sell the asset, or it can keep using the asset and earn cash from it. A sensible owner picks the better route. So recoverable amount is the higher of net selling price and value in use.

Net selling price is the amount obtainable from sale in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal. Disposal costs are things like legal costs, stamp duty and similar transaction taxes, and costs of removing the asset. Finance costs and income tax expense are not disposal costs. If there is a binding sale agreement, use its price. If there is an active market, use the market price. Otherwise use the best available information.

Value in use is the present value of the estimated future cash flows expected from continuing use of the asset and from its disposal at the end of its useful life. You estimate the cash flows, then discount them. Cash flows come from reasonable and supportable assumptions, give more weight to external evidence, and rely on the most recent approved budgets or forecasts, which normally cover a maximum of five years unless a longer period can be justified. Beyond that period, extrapolate using a steady or declining growth 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. Do not double count risk: if the cash flows are already adjusted for risk, the rate should not be adjusted again for the same risk.

If either amount is higher than the carrying amount, the asset is not impaired, and you need not compute the other.

Key rules to remember

Recoverable amount: Recoverable amount = Higher of (Net selling price, Value in use); If either figure exceeds the carrying amount, there is no impairment, so the other need not be computed.
Net selling price: Net selling price = Selling price (arm's length) − Costs of disposal; Costs of disposal exclude finance costs and income tax expense.
Value in use: Value in use = Σ [Net cash flow in year t × 1 ÷ (1 + r)^t], including net disposal proceeds in the last year; r is the pre-tax discount rate. Use the present value factors given in the question.
Net cash flow for a year: Cash inflows from continuing use − Cash outflows necessary to generate them (including overheads directly attributable or allocable on a reasonable basis); Exclude financing activities and income tax receipts or payments.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount (if carrying amount is higher); Recognised as an expense in the statement of profit and loss unless the asset is carried at a revalued amount.
Cash flow exclusions and conditions: Exclude: future restructuring not yet committed, future capital expenditure that improves or enhances performance, financing flows, tax flows; Include future cash outflows needed to maintain the asset's expected performance.

How to solve Measuring Recoverable Amount: Net Selling Price and Value in Use questions

Use this order for any recoverable amount question. It protects step marks even if a number goes wrong.

1Write the carrying amount of the asset (or cash generating unit) at the date of test, after depreciation up to that date.
2Compute net selling price: take the selling price or market price and deduct the disposal costs. Leave out finance costs and tax.
3Decide whether you need value in use. If net selling price already exceeds the carrying amount, stop: there is no impairment.
4List the cash flows year by year. Keep only cash from using the asset, remove financing and tax items, and add net disposal proceeds in the final year.
5Discount each year's net cash flow using the pre-tax rate or the factors given. Add the present values to get value in use.
6Take the higher of net selling price and value in use as recoverable amount.
7Compare with carrying amount. If carrying amount is higher, the difference is the impairment loss. State clearly where it is charged and the new carrying amount.
8Write the journal entry if asked: Impairment Loss A/c Dr, To Asset A/c.

Quickest way: Exam-speed approach for recoverable amount

When to use it: Use this when time is short, especially in a 6 to 8 mark numerical on impairment.

Do net selling price first. It takes one line and may end the question if it exceeds carrying amount.
Cross out every cash flow that is financing, tax, or from future improvement or restructuring not yet committed.
Make a small table with columns: Year, Net cash flow, Factor, Present value. Fill it in, then total.
Add the disposal proceeds to the last year's cash flow before applying the factor, not separately at the end undiscounted.
Write the comparison line: Recoverable amount = higher of the two. Then the impairment loss.
For MCQs, check three traps: undiscounted disposal proceeds, disposal costs not deducted, and taking the lower instead of the higher figure.

Common mistakes in Measuring Recoverable Amount: Net Selling Price and Value in Use

Taking the lower of net selling price and value in use as recoverable amount.
Students link impairment with prudence and assume the lower figure is safer.
Fix: Recoverable amount is always the higher of the two, because the owner will choose the better route. Say this in one line in the answer.
Not deducting costs of disposal from the selling price.
The question gives costs in a separate line and students treat the price as the answer.
Fix: Always write Selling price − Disposal costs. Remember that finance costs and income tax expense are not disposal costs.
Including financing cash flows or tax payments in the cash flow estimate.
Students copy every cash item listed in the question.
Fix: Value in use uses pre-tax cash flows from operations of the asset. Strike out interest, loan repayments and tax before discounting.
Including future capital expenditure that will improve or enhance the asset, or a restructuring not yet committed.
These flows are in the forecast and look relevant.
Fix: Estimate cash flows for the asset in its current condition. Include only outflows that maintain its expected performance.
Leaving out the disposal proceeds at the end of useful life, or leaving them undiscounted.
Students focus on operating cash flows and forget the last step.
Fix: Add net disposal proceeds to the final year's cash flow and discount them with that year's factor.
Computing both figures every time and wasting time, or using a post-tax discount rate.
Students follow a fixed routine without checking and misread the rate given.
Fix: Stop once one figure exceeds the carrying amount. Use the pre-tax rate as the standard requires.

Worked examples

Example 1

A machine has a carrying amount of ₹50,00,000 on 31 March. Its expected selling price in an arm's length transaction is ₹46,00,000 and disposal costs are ₹1,00,000. Its estimated future net cash flows from use are: Year 1 ₹12,00,000; Year 2 ₹15,00,000; Year 3 ₹14,00,000. Net disposal proceeds at the end of Year 3 are ₹5,00,000. The pre-tax discount rate is 10%. Factors at 10%: Year 1 0.909; Year 2 0.826; Year 3 0.751. Compute recoverable amount and impairment loss.

Show the solution

Net selling price = ₹46,00,000 − ₹1,00,000 = ₹45,00,000.
This is below the carrying amount of ₹50,00,000, so compute value in use.
Year 3 cash flow including disposal = ₹14,00,000 + ₹5,00,000 = ₹19,00,000.
Present value Year 1 = ₹12,00,000 × 0.909 = ₹10,90,800.
Present value Year 2 = ₹15,00,000 × 0.826 = ₹12,39,000.
Present value Year 3 = ₹19,00,000 × 0.751 = ₹14,26,900.
Value in use = ₹10,90,800 + ₹12,39,000 + ₹14,26,900 = ₹37,56,700.
Recoverable amount = higher of ₹45,00,000 and ₹37,56,700 = ₹45,00,000.
Impairment loss = ₹50,00,000 − ₹45,00,000 = ₹5,00,000.

Answer: Recoverable amount is ₹45,00,000 (net selling price). Impairment loss is ₹5,00,000, charged to the statement of profit and loss. The machine is carried at ₹45,00,000 after the loss.

Example 2

An asset has a carrying amount of ₹30,00,000. Its net selling price cannot be reliably determined because there is no active market. Management's approved forecast gives net cash flows from use (before tax and financing) of ₹9,00,000 in Year 1 and ₹11,00,000 in Year 2. The forecast also includes ₹2,00,000 interest on a loan in Year 1 and ₹1,00,000 income tax paid in Year 2, which are not part of the net cash flows given. At the end of Year 2 the asset is expected to be sold for net proceeds of ₹16,00,000. Pre-tax discount rate is 12%. Factors at 12%: Year 1 0.893; Year 2 0.797. Find the impairment loss.

Show the solution

Net selling price cannot be determined, so recoverable amount can be taken as value in use.
The given net cash flows are already before tax and financing, so interest and tax are not deducted again.
Year 2 cash flow including disposal = ₹11,00,000 + ₹16,00,000 = ₹27,00,000.
Present value Year 1 = ₹9,00,000 × 0.893 = ₹8,03,700.
Present value Year 2 = ₹27,00,000 × 0.797 = ₹21,51,900.
Value in use = ₹8,03,700 + ₹21,51,900 = ₹29,55,600.
Value in use is below the carrying amount of ₹30,00,000, so there is an impairment.
Impairment loss = ₹30,00,000 − ₹29,55,600 = ₹44,400.

Answer: Recoverable amount (value in use) is ₹29,55,600. Impairment loss is ₹44,400. Interest and tax are excluded from the cash flows.

Exam tips

Start every numerical with a line for the carrying amount, then net selling price. This earns marks even if the later working goes wrong.
Check which discount factors the question gives and apply the final year's factor to operating cash flow plus disposal proceeds together.
Cross out financing, tax and future improvement or uncommitted restructuring cash flows, and say why in a short note.
Write the definition line: recoverable amount is the higher of net selling price and value in use. Examiners look for it.
In theory questions on the discount rate, state that it is pre-tax, reflects current market assessments of time value of money and asset-specific risks, and that risk should not be counted twice.

Practice questions from AS 28 Impairment of Assets

Measuring Recoverable Amount: Net Selling Price 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: Net Selling Price and Value in Use: frequently asked questions

What is the difference between net selling price and value in use?

Net selling price is what you would get from selling the asset now, less disposal costs. Value in use is the present value of cash you expect from using the asset and selling it at the end of its life. Recoverable amount is the higher of the two.

Do I always need to calculate both net selling price and value in use?

No. If either one is more than the carrying amount, the asset is not impaired and you need not compute the other. Also, if net selling price cannot be determined, you can take value in use as the recoverable amount.

Which discount rate is used in value in use under AS 28?

Use a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. In exam questions the rate or the factors are usually given. Use them as they are.

Which cash flows are included in value in use?

Include cash inflows from continuing use, the outflows needed to generate them, and net disposal proceeds at the end of useful life. Exclude financing flows, income tax flows, and future improvement or uncommitted restructuring flows.