Recoverable Amount under Ind AS 36: Fair Value and Value in Use

Understand Measuring Recoverable Amount: Fair Value and Value in Use

Key rules to remember

Recoverable amount

Recoverable amount = Higher of (FVLCOD, VIU)

Para 18. Applies equally to an individual asset or a CGU.

Fair value less costs of disposal

FVLCOD = Fair value − Direct incremental costs of disposal

Fair value is measured under Ind AS 113. Costs of disposal are only the direct incremental costs.

Value in use

VIU = Σ [Expected net cash flow in year t ÷ (1 + r)^t]

Include the net cash flow from final disposal in the last year. r is the discount rate.

Impairment test

Impaired if Recoverable amount < Carrying amount

Impairment loss = Carrying amount − Recoverable amount.

Shortcut rule

If FVLCOD > Carrying amount, or VIU > Carrying amount, no impairment

Para 19. The other amount need not be estimated.

CGU with recognised liability

Deduct the liability's carrying amount from both the CGU's carrying amount and its VIU

Para 78. FVLCOD is the price for the assets and liability together, less disposal costs.

How to solve Measuring Recoverable Amount: Fair Value and Value in Use questions

1. 1Identify the level of testing. Check whether the asset generates largely independent cash inflows. If not, test the CGU.
2. 2Work out the carrying amount at the same level, after depreciation to date. For a CGU with a recognised liability that the buyer would assume, deduct that liability.
3. 3Apply the shortcut. If the FVLCOD given exceeds carrying amount, stop: no impairment (para 19).
4. 4Compute FVLCOD as fair value less direct incremental disposal costs. Do not deduct finance costs or tax.
5. 5Compute VIU. Take the pre-financing net cash flows from the approved forecasts, add disposal proceeds in the final year, and discount at the given rate.
6. 6Take the higher of FVLCOD and VIU as recoverable amount.
7. 7Compare with carrying amount. If recoverable amount is lower, the difference is the impairment loss.
8. 8State the conclusion and the accounting effect in one line.

Quickest way: Check FVLCOD first, then discount only if needed

Common mistakes in Measuring Recoverable Amount: Fair Value and Value in Use

• Using the lower of FVLCOD and VIU as recoverable amount.

  Students link impairment with conservatism and expect the lower figure.

  Fix: Recoverable amount is always the higher of the two. The higher figure shows the best value the entity can recover.

• Deducting finance costs or income tax from the cash flows used in VIU, or computing both measures when one is enough.

  Students copy a DCF habit from other papers, or they feel both calculations are mandatory.

  Fix: Do not build financing or tax items into the cash flows unless the question expressly says so. Use para 19 to stop early when one measure already exceeds carrying amount.

• Forgetting the disposal proceeds at the end of the asset's life in VIU.

  Students focus only on operating cash flows.

  Fix: Add the expected net cash flow from final disposal to the last year's cash flow before discounting.

• Deducting a recognised liability from the CGU's VIU but not from its carrying amount, or the reverse.

  Students miss that the comparison must be like for like.

  Fix: Under para 78, deduct the liability from both the carrying amount and the VIU when the buyer would assume it. FVLCOD is already net of it because it is the price for assets and liability together.

• Treating a fair value with no quoted price as unusable.

  Students think FVLCOD needs an active market.

  Fix: Para 20 says FVLCOD may be measurable without a quoted price for an identical asset. Only if no reliable basis exists may you use VIU as recoverable amount.

Worked examples