Corporate Accounting: Analysis of Recoverable Amount & Fair Value

This essay provides an analysis of key concepts in corporate accounting, specifically focusing on the evaluation of 'recoverable amount', 'value-in-use', and 'fair value less cost of disposal'. It explains how these terms are used in the context of asset impairment, referencing relevant accounting standards such as IAS 36. The recoverable amount, defined as the higher of fair value less costs to sell and value-in-use, is crucial for assessing potential asset impairment. Value-in-use is the present value of future cash flows expected from an asset, considering factors like cash flow projections and discount rates. Fair value less cost of disposal represents the amount obtainable from the sale of an asset in an arm's length transaction, net of disposal costs. The essay emphasizes the interrelation of these variables in the decision-making process regarding asset management and impairment.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Part A.................................................................................................................................2
Introduction.....................................................................................................................2
Computation of “Recoverable Amount”, “Value-in-use” and “Fair Value less
disposable cost”.............................................................................................................3
Conclusion......................................................................................................................7
Part B.................................................................................................................................8
Reference List..................................................................................................................10

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Part A
Introduction
This section of the paper constitutes of preparing an essay that would look to
address the method and the system that is used in order to evaluate “recoverable
amount”, “fair value less the cost of disposal” and “value-in-use”. Each and every
organization in order to maintain their effective level of business constructs financial
statements and records in order to have an understanding of the effectiveness of the
companies and accordingly take measures with the help of which they can improve their
financial activities (Price 2015). The terms that would be explained in this essay are
associated to impairment of assets that are done by the companies when essential.
These terms have significant values and therefore the companies look to evaluate these
values and amount in order to undertake the decisions related to the option that would
be chosen for the purpose of moving the business forward.

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Computation of “Recoverable Amount”, “Value-in-use” and “Fair Value less
disposable cost”
Recoverable Amount
The word that has been mentioned above is a financial word and “recoverable
amount” of an asset is known to be the greater of the “fair value less expenses to sell”
and the “value-in-use”. In order to measure and evaluate the impairment, the carrying
value of the assets is undertaken with a comparison with their recoverable amount
(Basu 2017).
The recoverable amount is ascertained for each and every asset. Conversely,
Whittington (2015) explained that if an asset is unable to create inflow of cash that are
mostly free and independent in nature with respect to the ones from the other assets,
the “recoverable amount” is ascertained for the “cash generating unit” within which the
asset fits. The “cash generating unit” is the lowest and the smallest recognisable group
of asset that creates inflow of cash that are mostly free of the inflow of cash from the
other assets or the group of assets. The “recoverable amount” is a significant indicator
of impairment.

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Value-in-use
This is known to be the current worth of the “future cash flows” that is anticipated
to be attained from the asset or a cash generating unit. The computation of the value-in-
use is inclusive of:
Projections of cash flow
 This is an estimate of the cash flows for the future that the individual anticipates
to attain from the assets.
 The anticipations about the probable variations in the timing or the amount of the
cash flows for the future (Avallone and Quagli 2015).
Discount Rate
 Time value of money: It is known to be the pre-tax rate of discount that are
replicates the present market evaluations of the “time value of the money” and
the risks that are associated to the asset with respect to which the estimations of
the “future cash flows” have not been adjusted (Baboukardos and Rimmel 2014).
 The values for bearing the indecisions existent within the asset, which can be
observed in either the estimates of the cash flows or in the rate of discount.
 The other features like the illiquidity, that the respondents of the market replicate
in the future cash flow pricing that the companies anticipate attaining from the
asset.
During the time of the assessment of the value-in-use, the cash flow estimates of
the entities are:

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 Needs to be reliant in the supportable and reasonable estimates that represent
the precise estimates of the management out of the set of the economic
scenarios that will be there over the rest of the valuable life of the asset
(Bozzolan, Laghi and Mattei 2016).
 It needs to be reliant on the most current financial estimates that have been
sanctioned by the management, without adding the cash outflows and the inflows
from the future remodelling, with respect to which the companies are not
dedicated to.
 It needs to be inclusive of the cost of borrowing, receipts of the income tax or the
capital expenses and the payments that enhance the performance of the assets.
 It should be inclusive of the overheads that are attributed directly or can be
assigned on a consistent and reasonable way and the value of the cost of
transactions if the disposal is anticipated at the closure of the useful life of the
assets.
IAS 36 addresses that value-in-use needs to be replicate the current value of the
estimated cash flow of the future, which is the weighted average of all the probable
results. In practicality, the current values are prepared either by the conventional or the
expected approach of the cash flow (Gordon and Hsu 2017). In theoretical way, the
result of the test of impairment would be same irrespective of the process that would be
used.

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Fair Value less cost of disposal
“Fair value less cost of disposal” also referred to as the “fair value less cost” to
sell is the value that is gathered from the asset sales within transactions that re within
the arm’s length among the willing and the skilled parties, deducted by the disposal
costs (Rahman and Mohamed 2018). The calculation of the fair value less cost of
disposal for an asset is even determined if there are no binding contract, but the asset is
traded in the market that is active, then the fair value less cost of disposal is the market
price of the asset deducted by the cost of disposal. In case, market price is not there,
then this value is calculated by the help of the process of discounted cash flow. It is
seen that this term is even related to the impairment of the assets.

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Conclusion
The completion of the essay has been possible with the help of explaining all the
three terms and it is seen that all then three variables have extensive role to play that is
related to the impairment of the assets. The explanations have determined the fact that
the all the three variables are inter-related to each other and each of them have their
own role to play during the process of asset impairment.

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Part B

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Reference List
Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the
goodwill impairment test under IAS 36. Advances in Accounting, 31(1), pp.107-114.
Baboukardos, D. and Rimmel, G., 2014, March. Goodwill under IFRS: Relevance and
disclosures in an unfavorable environment. In Accounting Forum (Vol. 38, No. 1, pp. 1-
17). Elsevier.
Basu, A., 2017. Impairment of Intangible Assets-An Effort to Convergence. International
Journal of Engineering and Management Research (IJEMR), 7(5), pp.210-214.
Bozzolan, S., Laghi, E. and Mattei, M., 2016. Amendments to IAS 41 and IAS 16:
implications for accounting for bearer plants. ZEMEDELSKA EKONOMIKA, 62(4),
pp.160-171.
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.
Price, J., 2015. The regulator: Understanding impairment. Company Director, 31(7),
p.12.
Rahman, A.A. and Mohamed, A.S., 2018. Investigating the Early Implementation of
MFRS 136 Disclosure among Top 50 Firms in Malaysia. Asian Journal of Accounting
and Governance, 8, pp.59-76.
Whittington, G., 2015. Fair value and IFRS. The Routledge Companion to Financial
Accounting Theory, pp.217-235.

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