Corporate Accounting and Reporting: Analysis of Recoverable Amount

This essay provides a detailed explanation of how to calculate the recoverable amount of an asset, which is the higher of its fair value less costs of disposal and its value in use. It references IAS 36 to explain impairment of assets and how to determine if an asset's carrying amount exceeds its recoverable amount. The essay defines value in use as the present value of expected future cash flows from an asset and discusses the estimation of these cash flows, including variations in timing and the time value of money. Fair value is defined according to IFRS 13 as the price received for selling an asset in an orderly transaction. The essay also explains how to determine fair value less costs to sell, emphasizing the importance of using binding sale agreements or active market prices when available. The conclusion highlights the importance of comparing these values to gain insights and recommends prioritizing the reliability of fair value while carefully estimating cash flows for value in use.

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate accounting and reporting
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How to calculate recoverable amount, value in use and fair value less cost of
disposal
The recoverable amount of a given asset is treated to be greater of its fair
value after deducting costs to sell as well as its value in use. In order to measure
these impairment of asset, the carrying amount of an asset is needed for comparing
it with the recoverable amount (Sellhorn and Stier 2017). However, the recoverable
amount can be easily obtained for each of the individual assets at a time. The
recoverable amount of various types of intangible assets can be easily measured on
annual basis and it need to be taken into consideration as to whether or not there is
any signal that it need to be impaired for given period of time. In most of the cases, it
can be seen that recent detail calculation of recoverable amount can be made during
initial period and it need to be used in the impairment test for treatment of given
asset for present time frame. Proper detailed explanation can be found in IAS 36.10.
Calculation of recoverable amount can be done for an intangible assets with an
indefinite life of useful assets, an intangible assets that is not yet available,
acquisition of goodwill as needed in business combination.
Value in use refers to the present value of the expected future cash flows that
need to be obtained from an asset or in that case other cash generating units. It is
mentioned in IAS 36 about Impairment of Assets that help in understanding whether
asset of given business entity are carried out at more than their recoverable amount
or not (Kabir, Rahman and Su 2017). This actually means higher of fair value after
deducting costs of disposal as well as value in use at the same time. Calculation of
value in use can be done and it had to show various components and it include an
estimation of future cash flows where the business can expect the amount that can
be derived from given asset. In addition to that, calculation will be done for the

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component and expected regarding probable variations that is shown in the amount
or timing of those future cash flows. It actually takes into account time value of
money that is dominated by current market risk-free rate of interest. Calculation of
value in use will be based upon the price for bearing the uncertainty as inherent in
the given asset. However, there are several factors like illiquidity where the market
participants would look at the pricing fluctuations as it reflects upon the future cash
flows as expected for deriving from a given asset (Price 2015).
Fair value refers to the price that would be received for selling an asset or
paid for transferring a liability in an orderly transactions and this activity took place
among market participants at given measurement date (Whittington 2015). Complete
information can be obtained by viewing IFRS 13 that explain about Fair Value
Measurement in detailed way. Fair value is obtained and this had been mentioned or
aligned with IFRS 13 Fair Value Measurement. Fair value less cost to sell is one of
the amount that can be obtained from the sale of an asset in an arm’s length
transaction that takes between knowledgeable as well as willing parties, less the cost
of disposal at the same time. In addition to that, this particular term need to remain
consistent by nature on the basis of measurement and work in accordance with IFRS
5 Non-current assets held for sale and discontinued operations. It is properly
mentioned in IAS 36 that hierarchy need to be maintained for determining fair value
less costs to sell of a given asset (Lubbe, Modack and Watson 2014). Furthermore, it
can be seen that the best evidence shown is the price used during binding sale
agreement in the arm’s length transactions as it get adjusted for incremental costs as
it will be directly attributable to the disposal of the asset in the most appropriate way.
However, if there is no binding sale agreement, then it can be seen that the asset
need to be traded in an active market. On the contrary, if there is no binding sale

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agreement or in that case active market present for treatment of such asset, then
Fair value less costs to sell will be working its best for rendering valuable information
to reflect the amount where business can get information at the end of the reporting
period from the disposal of its asset in an arm’s length transaction and this can be
done after deducting the costs of disposal for given period of time (Ratzinger-Sakel
and Theis 2017).
At the end, it can be concluded by comparing all these components such as
value in use and recoverable amount as it will help in providing better understanding
or insights of information regarding the same. There are two types of values that can
be found in an asset and these are recoverable amount as compared with its
carrying value (Linnenluecke et al. 2015). On making comparison that involves
carrying value with the recoverable amount, it is found that recoverable amount is
treated to be highest than the other two such as value in use or fair value less cost of
disposal. Each of the concepts had been mentioned above with proper justification
and process used for calculating those. It is always recommended to use reliability of
the fair value as it becomes bit difficult to generate reliable information by basing the
value in practical terms. In case of value in use, it is all about estimating the cash
inflows as well as outflow for given asset. It is not always about the revenues or
profits, it is even about the related or associated expenses as well as future
investments that need to be taken into consideration for future estimated period
(Fleischmann, Galbreth and Tagaras 2016).

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Reference List
Fleischmann, M., Galbreth, M.R. and Tagaras, G., 2016. Product acquisition,
grading, and disposition decisions. In Closed-loop Supply Chains (pp. 116-135).
Auerbach Publications.
Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill
Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Lubbe, I., Modack, G. and Watson, A., 2014. Financial accounting GAAP
principles. OUP Catalogue.
Price, J., 2015. The regulator: Understanding impairment. Company Director, 31(7),
p.12.
Ratzinger-Sakel, N.V. and Theis, J.C., 2017. Does Considering Key Audit Matters
Affect Auditor Judgment Performance?.
Sellhorn, T. and Stier, C., 2017. Fair Value Measurement for Long-Lived Operating
Assets: Research Evidence.
Whittington, G., 2015. Fair value and IFRS. The Routledge Companion to Financial
Accounting Theory, pp.217-235.