Corporate Accounting and Reporting: Calculation of Recoverable Amount, Value-in-use and Fair Value Less Disposal Cost

This essay provides an in-depth discussion of the procedure used for computing the value-in-use, recoverable amount and fair value less disposal cost. It also explains the relationship between these values and how they are computed during asset impairment. The essay is relevant for students studying corporate accounting and reporting.

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate Accounting and Reporting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1CORPORATE ACCOUNTING AND REPORTING
Table of Contents
Answer to Part A:..........................................................................................................2
Introduction:..............................................................................................................2
Calculation of “recoverable amount”, “value-in-use” and “fair value less disposal
cost”:..........................................................................................................................2
Conclusion:...............................................................................................................7
Answer to Part B:..........................................................................................................8
References:................................................................................................................10

2CORPORATE ACCOUNTING AND REPORTING
Answer to Part A:
Introduction:
The current essay takes into account the motive of providing an in-depth
discussion of the procedure, which is used for computing the
value-in-use”, “recoverable amount’ and “fair value less disposal cost”. The
organisations operating in the global economy aim to maintain their financial
information appropriately and therefore, they are involved in preparing financial
statements. This is because they plan to record all the associated assets and
liabilities inherent in their business activities, processes and operations. Additional
assistance needs to be provided in relation to the asset valuation for gaining an
overview of the business profit in an appropriate manner (Badia et al. 2017). Hence,
it mandates the need for all the business organisations to compute the above-stated
items so that actual and authentic financial reports could be generated.
Calculation of “recoverable amount”, “value-in-use” and “fair value less
disposal cost”:
Recoverable amount could be considered as an accounting aspect, which is
involved in addressing the market values of the assets. These values could be either
greater or the value that the business organisations have reported being used in the
existing the operational processes of the businesses. This concept is prevalent in the
business organisations widely for gaining an understanding of the impairment
associated with fixed assets (Barker and Penman 2016). This is taken into account
in the form of optimum value, which is to be attained on the part of an asset. Two
processes are present through which the recoverable amount could be calculated
and these include either by utilising the business assets or by selling the asset.

3CORPORATE ACCOUNTING AND REPORTING
The values of assets of an organisation are denoted by the present value of
the projected future cash inflows, which is to be utilised by the assets. The asset
value disposed or sold is denoted as the fair value of the assets subtracted by the
amount spent in selling off the asset. The amount recovered between the greater of
the two values is termed as the recoverable amount. This amount is immensely
beneficial in order to undertake the impairment test. In addition to this, recoverable
amount is considered as the greatest value, since the management of an
organisation has the motive to choose that option, which has the ability to provide
the optimum capability (Barker and Schulte 2017).
As per the accounting fundamentals, all the business organisations are
needed to keep records within their balance sheet statements in circumstances at
the time the carrying amount exceeds the recoverable amount. Various
circumstances could be observed, in which at the time an organisation plans to
estimate that the value of an asset is impaired, it introduces a formal projection of the
amount expected to be recovered. The approach is feasible with the concept of
minimising the expenses or minimisation in market worth related to the inventory.
According to AASB 136 (IAS 36), it is necessary for the financial experts in
undertaking the same and it has been addressed through various phases. If the fair
values of the assets after subtracting the cost of disposal are not computed, no
difference in value could be observed between recoverable amount and value-in-use
(Goncharov, Riedl and Sellhorn 2014). Secondly, when the organisation decides to
sell the assets, the recoverable amount becomes identical to the fair value after the
subtraction of disposal expense.
In the words of Gordon and Hsu (2017), if the fair value of an asset obtained
after subtraction of the cost of disposal and the worth of the asset used is higher

4CORPORATE ACCOUNTING AND REPORTING
opposed to the carrying amount, there is no need for computing the recoverable
amount due to the fact that the asset is not required to be impaired. The recoverable
amount could be computed with the help of the following formula:
Recoverable amount = Fair value - Disposal cost
Recoverable amount = Value-in-use
Value-in-use is prepared for defining the current worth of cash flows
expected in future, which is developed through effective utilisation of assets. It is
necessary for a business organisation to ascertain the value-in-use for an asset as a
part of the process, which aims to identify whether the asset is needed to be
impaired (Penner, Kreuze and Langsam 2016). If the organisation finds any
indication that the asset is to be impaired, it needs to conduct an official projection of
the amount, which is recoverable. This method is observed to be in tandem with the
minimised net worth or minimisation in the overall expenditures. According to AASB
137 (IAS 36), it has been disclosed that if the fair value of the asset after deduction
of the disposal cost is not developed, no difference could be found in the values of
recoverable amount and value-in-use (Price 2015).
There are certain elements requiring special consideration for calculating the
value-in-use and these elements primarily constitute of discount rate and cash flow.
Estimations are extremely important for preparing the cash flow statement and the
estimations could be in the form of planning and current projections. In this context,
Sellhorn and Stier (2017) advocated that budgets are estimated for nearly or more
than five years, which allows the financial analysts in evaluating the information
within a limited timeframe. In order to calculate the value-in-use, the following
formula is used:

5CORPORATE ACCOUNTING AND REPORTING
Value-in-use = Present value of the asset benefits
Fair value less disposal cost signifies the expenses having incremental
nature and the calculations are made by characterisation in order to remove assets
(Tran et al. 2017). The fair value less disposal cost is necessary, since this is
important in analysing recoverable value and the above-stated value is used by the
organisations for impairment of assets.
All these three concepts are stated in AASB 136 and their measurement
bases are provided as well. According to “Paragraph 19 of AASB 136”, it is not
essential to ascertain the fair values of assets obtained from deduction of disposal
cost and value-in-use. In case, any of these amounts is higher compared to the
carrying amount of the asset, the asset is not impaired and the other amount need
not be estimated (Aasb.gov.au 2018). In addition, it is not essential in ascertaining
the fair value less disposal cost despite the fact there is no trading of a particular
asset in the active market. However, difficulty might arise in calculating the fair value
due to the absence of any base for developing a reliable estimate of the amount
receivable from selling the asset between willing and knowledgeable parties.
In compliance with “Paragraph 22 of AASB 136”, the ascertainment of
recoverable amount is made for an individual asset, unless the asset fails to
generate cash inflows, which do not have any sort of association with the other
classes of assets in the organisation. In such case, the recoverable amount is
ascertained for the cash-generating unit under which the asset falls. However, there
are two exceptions to this case, where ascertainment is not possible. The first
exception is that the fair value of the asset less disposal cost is greater than the
carrying value. The second exception is that the value-in-use of the asset could be

6CORPORATE ACCOUNTING AND REPORTING
projected near to the fair value; however, it is not possible to determine the fair
value.
According to “Paragraph 25 of AASB 136”, the evidence of the fair value of
an asset less disposal cost is a price involved in an agreement of sale and it is
adjusted with the incremental cost, which is attributable directly to the asset disposal.
In case, the asset trades in the active market despite the absence of any agreement
of sale, the value of the asset would be lower than the overall disposal cost. In this
case, the bid price would be considered in the form of appropriate market price, as
stated in “Paragraph 26 of AASB 136”. In case of unavailability of the current bid
price, the price of the latest transaction might give a basis from which the fair value
could be estimated. In addition, no significant changes are there in economic
circumstances between the date of transaction and the date of estimation
(Whittington 2015).
According to “Paragraph 26 of AASB 136”, there are several items that need
to be taken into consideration for the value-in-use of the asset. These items
constitute of projection of the future cash flows expected from the asset,
expectations regarding the possible variations in the timing or amount of future cash
flows, time value of money and illiquidity factors. In accordance with the accounting
fundamentals, all the business organisations are needed to keep records within their
balance sheet statements in circumstances at the time the carrying amount exceeds
the recoverable amount. Various circumstances could be observed, in which at the
time an organisation plans to estimate that the value of an asset is impaired, it
introduces a formal projection of the amount expected to be recovered (Zhuang
2016).

7CORPORATE ACCOUNTING AND REPORTING
Conclusion:
Several explanations have been provided in this paper, which are in tandem
with the questions raised and the enumeration of the financial terms addresses the
fact that all the three items have direct relationship among each other, since these
values are computed in an identical pattern. It could be observed that during asset
impairment, the finance specialists primarily compute these values so that the
organisations could obtain an overview of the optimal amount to be attained and the
same could be used for ascertaining the asset value and market value of the asset.
The values of assets of an organisation are denoted by the present value of
the projected future cash inflows, which is to be utilised by the assets. The asset
value disposed or sold is denoted as the fair value of the assets subtracted by the
amount spent in selling off the asset. The amount recovered between the greater of
the two values is termed as the recoverable amount. This amount is immensely
beneficial in order to undertake the impairment test. In addition to this, recoverable
amount is considered as the greatest value, since the management of an
organisation has the motive to choose that option, which has the ability to provide
the optimum capability.
All these three concepts are stated in AASB 136 and their measurement
bases are provided as well. It is not essential to ascertain the fair values of assets
obtained from deduction of disposal cost and value-in-use. In case, any of these
amounts is higher compared to the carrying amount of the asset, the asset is not
impaired and the other amount need not be estimated. In addition, it is not essential
in ascertaining the fair value less disposal cost despite the fact there is no trading of
a particular asset in the active market. However, difficulty might arise in calculating
the fair value due to the absence of any base for developing a reliable estimate of

8CORPORATE ACCOUNTING AND REPORTING
the amount receivable from selling the asset between willing and knowledgeable
parties.
Answer to Part B:
Particulars Amount (in $)
Assets' carrying amount (A) 434,200
Value-in-use of the division (B) 389,200
Fair value of the assets ( C) 281,276
Actual or real asset values (D) [Greater
of (B) and (C)] 389,200
Loss from Impairment (E) (A) - (D)] 45,000
Goodwill 15,000
Impairment loss from subtraction of
goodwill (E) - (F) 30,000
Apportionment of Impairment Loss:-
Particulars Carrying amount (in $) Pro-rata
Impairment Loss
Allocated (in $)
Adjusted Carrying
Amount (in $)
Goodwill 15,000 15,000
Equipment 292,000 69.69% 10,453.46 281,546.54
Copyright 67,000 15.99% 2,398.57 64,601.43
Machinery 42,000 10.02% 1,503.58 40,496.42
Inventory 18,000 4.30% 644.39 17,355.61
Total 419,000 100% 30,000 -

9CORPORATE ACCOUNTING AND REPORTING
In the books of Alex Limited
Journal Entry as on 30 June 2015
Date
Debit Credit
Particulars Amount (in $) Amount (in $)
30-Jun-15 Impairment Loss Account…………...Dr 30,000
To Goodwill Account 15,000
To Equipment Account 10,453.46
To Copyright Account 2,398.57
To Machinery Account 1,503.58
To Inventory Account 644.39
(Net assets and goodwill impaired based on
the recovery amount)
30-Jun-15 Income Statement Account………………..Dr 30,000
To Impairment Loss Account 30,000
(Value of impairment loss reallocated to the
income statement)

10CORPORATE ACCOUNTING AND REPORTING
References:
Aasb.gov.au., 2018. [online] Available at:
http://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-
09.pdf [Accessed 26 May 2018].
Badia, M., Duro, M., Penalva, F. and Ryan, S., 2017. Conditionally conservative fair
value measurements. Journal of Accounting and Economics, 63(1), pp.75-98.
Barker, R. and Penman, S., 2016. Moving the conceptual framework forward:
Accounting for uncertainty. Unpublished paper, Oxford University and Columbia
University.
Barker, R. and Schulte, S., 2017. Representing the market perspective: Fair value
measurement for non-financial assets. Accounting, Organizations and Society, 56,
pp.55-67.
Goncharov, I., Riedl, E.J. and Sellhorn, T., 2014. Fair value and audit fees. Review
of Accounting Studies, 19(1), pp.210-241.
Gordon, E.A. and Hsu, H.T., 2017. Tangible Long-Lived Asset Impairments and
Future Operating Cash Flows under US GAAP and IFRS. The Accounting
Review, 93(1), pp.187-211.
Penner, J.W., Kreuze, J.G. and Langsam, S.A., 2016. INSTRUCTORS'NOTES:
IMPAIRMENT ANALYSIS: COMPARISON OF IMPAIRMENT OF LONG-LIVED
ASSETS BETWEEN US GAAP AND IFRS. Journal of the International Academy for
Case Studies, 22(2), p.90.

11CORPORATE ACCOUNTING AND REPORTING
Price, J., 2015. The regulator: Understanding impairment. Company Director, 31(7),
p.12.
Sellhorn, T. and Stier, C., 2017. Fair Value Measurement for Long-Lived Operating
Assets: Research Evidence.
Tran, M.D., Doan, V.A., Bui, T.T. and Nguyen, M.C., 2017. Are Audits of Financial
Statements Born Unequal?. Asian Business Research, 2(3), p.16.
Whittington, G., 2015. Fair value and IFRS. The Routledge Companion to Financial
Accounting Theory, pp.217-235.
Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian
firms and whether they were impacted by AASB 136’. Accounting & Finance, 56(1),
pp.289-294.