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

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.