Calculation of Recoverable Amount, Value in Use and Fair Value less Cost of Disposal for Impairment Accounting in Australia

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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Author’s Note

1CORPORATE ACCOUNTING
Introduction
In the accounting process of the business organizations, the accounting treatment for the
impairment for the assets is considered as one of the major aspects. It needs to be mentioned that
the business organizations consider an asset as impaired when the asset possesses the market
price that is less than the listed value of that asset in the balance sheet (Capalbo 2013). The major
assets that are impaired in the organizations are goodwill, long-term assets and accounts
receivable as their carrying value has longer time span of impairment. It is required for the
business organizations to carry out the impairment accounting as per the required accounting
standards. In this context, it needs to be mentioned that the business organizations are required to
consider the correct measurement or calculation of crucial aspect of impairment; they are
Recoverable Amount, Value in Use and Fair Value less Cost of Disposal/Sale (Linnenluecke et
al. 2015). These are three aspects that the companies are required to correctly calculate or
measure for correct impairment accounting. The main aim of this essay is to analyze and
evaluate the processes of calculating these three aspects in Australia. Before the discussion, it is
important to mention that the Australian companies are needed to follow and comply with the
standards and principles of Australian Accounting Standard Board (AASB) 136, Impairment
of Assets for impairment accounting.
Calculation of Recoverable Amount
Recoverable amount is considered as a major part of the impairment calculation.
Recoverable amount is considered as the higher of the fair value of an asset after the deduction
of disposal cost and value in use. The following discussion shows the process to measure or
calculate the recoverable amount:

2CORPORATE ACCOUNTING
According to AASB 136, Paragraph 18, the definition of recoverable amount is
provided as higher of the fair value of an asset or a cash generating unit less selling cost and
value in use (aasb.gov.au 2018). There are different kinds of requirements that the accountants
are required to consider at the time of calculating the recoverable amount. As per this standard, it
is not always necessary for the determination of the fair value of the assets less selling cost and
its value in use. In case, either of these two amounts exceeds the carrying value of the assets, the
companies do not consider the asset as impaired; thus, there is not any necessity for the
estimation of any other amounts (aasb.gov.au 2018). It may be possible for the business
organizations for the determination of fair value less costs to sell; this is also applicable in case
an asset is not traded in the active market. However, in the absence of the required basis to make
the reliable estimation of the obtained amount from the sale of an asset, it is not possible for the
companies to determine the fair value of the assets. In this situation, the business entities have
the option for using the value of the asset as the recoverable amount (aasb.gov.au 2018).
For this reason, it is required for the business organizations for the correct measurement
and calculation of recoverable amount for the impairment accounting of the business
organizations (iasplus.com 2018). It is the obligation on the business organizations for the
determination of recoverable amount in case the asset fails in the generation of independent cash
flows compares to the other assets of the business organizations. In case, this situation can be
seen in the business organization, the determination of the recoverable amount is done for the
cash-generating unit. At the same time, it needs to be mentioned that the companies are not
required to calculate the value of recoverable amount in the presence of two situations. First, the
fair value of the asset less cost is greater than the carrying value of that asset. Second, the
companies are able in the estimation of the value in use of the asset close to the asset’s fair value