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CFA Level I · CFA Level I Exam · Analysis of Long-Term Assets

Under IFRS, an entity tests a long-lived asset for impairment because indicators exist. The asset's carrying amount is compared with its recoverable amount. Which of the following most accurately describes recoverable amount?

Recoverable amount under IFRS is the higher of fair value less costs of disposal and value in use. The entity is assumed to recover the asset's value through whichever route, sale or continued use, gives more. Undiscounted cash flows belong to the US GAAP first-step test.

  1. AThe higher of fair value less costs of disposal and value in useCorrect
  2. BThe lower of fair value less costs of disposal and value in use
  3. CThe undiscounted sum of expected future cash flows from the asset

Explanation

IFRS (IAS 36) defines recoverable amount as the higher of fair value less costs of disposal and value in use. The lower-of approach is wrong because management is assumed to recover value by the best route, sale or use. Undiscounted cash flows are used in the US GAAP recoverability test, not as the IFRS recoverable amount.

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