Recoverable amount: higher of two measures

Learning objectives

• Explain that the recoverable amount is the higher of fair value less costs of disposal and value in use.L1
• Calculate the recoverable amount and recognise when a single measure is sufficient (one already exceeds the carrying amount) or when fair value less costs of disposal may be used.L2, L3

Normative references

• IAS 36 §18Defines recoverable amount as the higher of fair value less costs of disposal and value in use, and states that paragraphs 19 to 57, written for "an asset", also apply to a CGU.
• IAS 36 §19Removes the need to determine both measures when one of them already exceeds the carrying amount, since the asset is then not impaired.
• IAS 36 §21When there is no reason to believe that value in use materially exceeds fair value less costs of disposal, the latter may be used as the recoverable amount; this is often the case for an asset held for disposal, whose value in use consists mainly of the net disposal proceeds.
• IAS 36 §23Permits the use of estimates, averages and computational short cuts if they provide a reasonable approximation.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

20 questions

• True or false? The recoverable amount of an asset is the higher of two amounts: its fair value less costs of disposal and its value in use.L1
• True or false? Out of prudence, an entity uses as recoverable amount the lower of fair value less costs of disposal and value in use.L1
• True or false? If an asset's fair value less costs of disposal already exceeds its carrying amount, the entity does not need to estimate its value in use to conclude that the asset is not impaired.L2
• How is the recoverable amount of an asset determined?L1
• Mirabel has decided to sell a disused warehouse: the sale is expected within a few months and the warehouse no longer generates operating cash flows. There is no indication that its value in use materially exceeds its fair value less costs of disposal. Which approach is appropriate for determining its recoverable amount?L2
• Which of the following statements about determining the recoverable amount are correct?L2
• At the end of 20X1, Arvel tests a hydraulic press that shows an indication of impairment. Its carrying amount is {carrying_amount}. An expert estimates its fair value less costs of disposal at {fvlcd} and management calculates a value in use of {value_in_use}. What is the recoverable amount of the press?L2
• Navalis operates a river cruise boat carried at {carrying_amount} at 31 December 20X1. A specialist ship broker values the price Navalis would obtain for the boat, net of costs of disposal, at {fvlcd}, while management's projections result in a value in use of {value_in_use}. Determine the recoverable amount of the boat.L2
• Kerlan owns a bottling line with a carrying amount of {carrying_amount}. Its fair value, determined under IFRS 13 and given as a datum, is {fair_value}; the costs of disposal of a sale are estimated at {costs_of_disposal}. The value in use calculated by management amounts to {value_in_use}. Determine fair value less costs of disposal, then the recoverable amount of the line.L3
• A logistics warehouse used by Pellion for its own deliveries is carried at {carrying_amount}. According to an IFRS 13 valuation given as a datum, it could be sold for {fair_value}, with costs of disposal of {costs_of_disposal}. The cash flows expected from its use result in a value in use of {value_in_use}. Calculate fair value less costs of disposal and the recoverable amount of the warehouse.L3
• Ondine tests a rolling mill with a carrying amount of 1,800,000. A firm offer from a buyer results in a fair value less costs of disposal of 2,100,000. The management controller proposes to also build a value in use model, whose expected result is about 1,600,000, and then to recognise an impairment loss of 200,000. What should be concluded?L3
• To estimate the recoverable amount of a cold-storage warehouse, Brémond's finance team uses the average operating costs of the last three years and a simplified model, rather than a detailed line-by-line projection. The differences found against a detailed projection prepared last year were minimal. The auditor asks whether this approach is acceptable.L3
• At the year-end, Corvane tests a laser-cutting machine with a carrying amount of {carrying_amount}. Its fair value (IFRS 13, given) is {fair_value}. A sale would involve {legal_fees} of legal costs and {removal_costs} of removal; Corvane also estimates at {reorganisation_costs} the reorganisation of its workshop that would follow the disposal. None of these costs is recognised as a liability. Value in use, calculated separately, is {value_in_use}. Determine the fair value less costs of disposal, the recoverable amount and the impairment loss.L3
• Aubrac Logistique owns a fleet of order-picking robots carried at {carrying_amount}. An independent valuer sets its fair value under IFRS 13 at {fair_value} (given), which is more than the carrying amount. However, disposing of the fleet would cost {stamp_duty} of stamp duty, {legal_fees} of lawyer's fees and {preparation_costs} of refurbishment directly required for the sale. A dismantling adviser has already invoiced {recognised_consultant_fee}, an amount recognised as a payable at the year-end. Value in use is {value_in_use}. What are the fair value less costs of disposal, the recoverable amount and any impairment loss?L3
• Ferrandes operates a quarry that forms a cash-generating unit (CGU). The carrying amount of the CGU's assets is 1,000,000. A provision for site restoration is recognised at 400,000; any buyer of the quarry would have to assume this obligation. A firm offer covers the assets and the obligation together: the fair value less costs of disposal of this package is 520,000. The value in use of the assets, before taking the restoration obligation into account, is 560,000. What is the impairment loss of the CGU?L3
• The Ardéco printing works is testing a rotary press with a carrying amount of {carrying_amount} that will be used for two more years. The expected net operating cash flows, received at year-end, are {cash_flow_year_1} for year 1 and {cash_flow_year_2} for year 2. At the end of year 2, reselling the press should provide a net cash flow of {net_disposal_flow}. The discount rate (given) is {discount_rate}. Current fair value less costs of disposal is {fvlcd}. Calculate value in use, recoverable amount and the impairment loss.L2
• A veterinary clinic, Vetalpe, is reviewing a scanner carried in its statement of financial position at {carrying_amount}. It has two years of use left. The finance department expects {operating_flow_1} of net operating cash at the end of the first year, then {operating_flow_2} at the end of the second, when the device would be sold to a refurbisher for an amount net of costs of disposal of {scrap_proceeds_net}. The discount rate provided is {discount_rate}. A broker currently estimates the scanner's fair value less costs of disposal at {fvlcd}. Determine value in use, recoverable amount and the impairment loss.L2
• At Belcastel, a refrigerated truck is carried at a cost of {cost} less {accumulated_depreciation} of accumulated depreciation. After losing a haulage contract, the entity estimates its fair value less costs of disposal at {fvlcd} and its value in use at {value_in_use}. Determine the impairment loss to recognise.L2
• Following the loss of a major customer (an indication of impairment), Quintal tests its Components CGU, to which goodwill of {goodwill} has been allocated. The unit's other assets have a carrying amount of {carrying_other_assets}. The unit's fair value less costs of disposal is {fvlcd} and its value in use is {value_in_use}. Determine the recoverable amount of the unit and the impairment loss.L3
• Loire Froid impaired a cold-storage warehouse in 20X1 based on its value in use. At the end of 20X2, an internal auditor reviews the closing file. Which step is wrong?L3