Computation of Recoverable Amount, Value in Use and Fair Value less Cost of Disposal for an Asset or CGU in terms of AASB 136 and AASB 13

This article explains the computation of recoverable amount, value in use and fair value less cost of disposal for an asset or CGU in terms of AASB 136 and AASB 13. It also covers the key terms and methodology adopted by the entity for valuation. The article is relevant for students studying corporate accounting and reporting.

CORPORATE ACCOUNTING AND REPORTING
The question deals with computation of recoverable amount, value in use and fair value
less cost of disposal for an asset or Cash Generating Unit in terms of AASB 136
Impairment of Asset and AASB 13 Fair Value Measurement(Australian Accounting
Standard Board, 2015)
Further, before analysing the computation of the aforesaid term, let us analyse the key
terms in the said standard;
(a) Asset Useful life: The said term shall mean that the time period over which the
company is anticipating to use such asset or the no. of pieces or units of the product
that company is expecting to produce form the asset.;(Federal Register of Legislation,
2015)
(b) Asset Value –in-use: The said term shall mean the presented value of future extreme
of benefits or cash flows that an entity is expecting to receive from an asset or a cash
generating unit.
(c) Cash Generating Unit or CGU: The term shall mean the smallest identifiable group
among the block of groups of the entity. The CGU generally has its own group of
assets and liabilities. It generates its own inflows and are independent of the cash
flows of the rest assets of the entity.
(d) Discounting Rate: It is implicit cost at which the future economic benefit to be
derived from an asset for computation of value in use of an asset shall be discounted.
(Federal Register of Legislation, 2015)
(e) Depreciable Amount of an asset: The term shall mean the historical cost of the asset
or the fair value as reduced by residual value of such asset.
(f) Fair Value of an Asset or CGU: The term is defined as the price which an asset shall
fetch when it is sold in the open market in an orderly transaction between market
participants at a measurement date
(g) Impairment loss of an Asset: The term represents the difference between the
recoverable amount of an asset as computed in terms of AASB 136 and the carrying
amount as computed in terms of AASB 116 Plant Property and Equipment. It shall be
noted that carrying value of an asset shall exceed recoverable amount for impairing
an asset;(Anon., 2017)
(h) Cost of disposal: The term shall mean to include those costs which are incidental to
sale of the asset like legal cost, stamp duty and is not recognised as liability in the
books of entity;

(i) Recoverable Amount of an Asset: In terms of AASB 136, recoverable amount of an
asset means the higher of value of fair value of an asset less cost of its disposal and
value in use of such asset.(Anon., 2018)
Computation of Recoverable Amount, Value in use , Fair value less cost of disposal
As per relevant para of AASB 136- Impairment of Asset, the computation of Fair value
less cost of disposal has been detailed here-in-below:
While measuring Fair value of an asset or a liability in terms of AASB 13 Fair Value
measurement, the characteristic of the asset or liability shall be taken into consideration.
Further, generally such characteristic of an asset or liability are taken into consideration
by the market participants while considering the fair price of the asset. In addition the
price to be determined shall be done under an orderly transaction and between
independent buyer and seller on a measurement date.
The computation of fair value less cost of disposal assumes that the same has taken place
in principal market or in the next most advantageous market available for the asset. In
addition, the model assumes that the buyers and sellers are acting in their best interest.
It shall also be pertinent to note that if price is available in principal market and better
price is available in next most advantageous market, the same shall not be considered for
computing fair value.
AASB 136 also states that the valuation methodology adopted by the entity should be
such that the data available to substantiate the market price or fair value is maximum and
shall minimise the use of unobservable inputs.
In relation to determination of Fair Market Value of a non-financial asset,one shall take
into consideration market participant’s ability to generate revenue of economic nature by
using such asset in its highest capacity and most viable use or by disposing it off to third
party who shall do the same;
Accordingly, the fair value of an asset shall be computed by taking into consideration the
above assumptions as stated in AASB 136 and AASB 13
Post computation of fair value, on needs to deduct all cost which are incidental to sale
and those which have not been recognised as liabilities in the books of account of the
entity. For ex cost such as legal cost, stamp duty etc.

Computation of Value-in-use
In terms of AASB 136, computation of Value in use shall involve the following
elements:
(a) Estimated future cash flows from such asset or CGU that an entity is anticipating to
generate;
(b) Determining and analysing the possible variation on the expected cash flow and th
variation in timing of such cash flow;
(c) The time value of money which shall be computed on the basis of current market risk
free rate of interest;
(d) The inherent uncertainty w.r.t price of such asset;
(e) Other factors that may be relevant like liquidity of such asset, buyers and seller of
such asset, market condition etc shall impact the computation of value in use of such
asset.
In addition, an analyst must consider following while computing the value in use of an
asset or a Cash Generating unit:
(a) Project cash inflow and outflow in the form of repair to be generated from the use of
such asset. Further, the revenue to be generated post disposal of such asset;
(b) The implicit cost i.e discount rate to be used for computation of present value of such
asset or cash generating unit.
Method to eatimate cash flows:
(a) The management assumptions to estimate the cash flow should be reliable so that the
estimation according to assumption come reasonable.It shall also take into account
the asset life and the economic condition which may arise over the life span of the
asset and more weight age should be given to outside evidences.
(b) If due to restructuring in future any cash flows crop up or may be due to any
improvement of performance of the company any cash flows arises these shall not
accounted for and taken into account.Unless a larger year value required all the
estimation shall be based on the basis of five year projections and all the cash flow
estimation shall be taken on the basis of most recent estimates of budget.
(c) All the cash flow which are predicted on the basis of rate must be of stable in nature
or it the rate might be downward moving unless it is supported by a proper record of
upward moving.Theproducts,industries or country or countries in which the company
is operated and the growth rate of such company shall not be more than the average
growth rate of industries in which the company is operating its business.
(d) Apart from above cash flows arising from financing activities or any payment or
receipt from income tax shall not be considered while estimating cash flows for
future years.

Measurement of recoverable amount:
In terms of AASB 136, recoverable amount of an asset means the higher of value of fair
value of an asset less cost of its disposal and value in use of such asset.
Further ,the impairment of asset shall only occur if the amount to be recovered from an
asset is less than the asset carrying value.
From the above method recoverable amount of an asset is to be arrived at. .
.
References:
Anon., 2017, Impairment loss, [Online]
Available at: https://www.accountingtools.com/articles/2017/5/10/impairment-loss
[Accessed 21 September 2018].
Anon., 2018, Recoverable Amount, [Online]
Available at: https://www.accountingtools.com/articles/2017/5/11/recoverable-amount
[Accessed 20 September 2018].
Australian Accounting Standard Board, 2015, Fair Value Measurement, [Online]
Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf
[Accessed 20 September 2018].
Federal Register of Legislation, 2015, AASB 136 - Impairment of Assets, [Online]
Available at: https://www.legislation.gov.au/Details/F2017C00297/Download
[Accessed 20 September 2018].
Federal Register of Legislation, 2015, Impairment of Assets, [Online]
Available at: https://www.legislation.gov.au/Details/F2017C00297/Download
[Accessed 20 September 2018].