Understanding Recoverable Amount, Value-in-Use And Fair Value Less Cost Of Disposal

Explanation of the Recoverable Amount, Value-in-Use and Fair Value less cost of disposal

This essay has been constructed in order to have an idea about the process that is used in order to have an understanding of the process that is used in order to calculate the “recoverable amount”, “value-in-use” and the “fair value less the cost of disposal”. In the current business world, it is essential to maintain an effective financial statement and accordingly sustain the operational activities. An understanding of the recoverable amount is essential in order to gain an idea about the amount that can be recovered and accordingly maintain competitive edge.

Explanation of the Recoverable Amount, Value-in-Use and Fair Value less cost of disposal

Recoverable amount is an accounting word and refers to the market value of an asset that is larger or the value that is provided by the organization that is being used at the present time period. The idea of recoverable amount is generally utilised in the idea of ascertaining the fixed asset impairments (Gordon and Hsu 2017). The recoverable amount is known as the highest value that can be attained from any kind of asset. There are two normal processes with the help of which one can attain the value of any kind of asset and the two processes are:

• By making use of the asset in the business
• By selling off asset to others

The worth of the asset of the business is known to be the “present value” of the anticipated future cash flows that is seen the usage of the asset (Bond, Govendir and Wells 2016). The asset value that is sold is known to the “fair value of the asset less the costs to sell the asset”. The amount that is found to be the highest out of the two options is known as the recoverable amount. The recoverable amount is utilised in order to assess the impairment (Vanza, Wells and Wright 2018). The factor that the recoverable amount is the highest value is because of the fact that the management of any organization looks to select the option that has the best value maximising ability.       

The principles of accounting addresses the organizations to record their instances in the balance sheet where the “carrying amount” of any asset is higher than the value that can be recovered (Price 2015). For instance, if the organization has a factor to make an assumption that the value of the assets is impaired, then the company needs to undertake a official projection of the “recoverable amount”. This process is very much similar to the idea of reduced cost or in many circumstances the market value which is applicable to the inventory. It is seen that IAS 36 has disclosed to the accountants with the course line on this aspect and has explained that:

• If the fair value of the asset subtracted by the “cost of disposal” cannot be ascertained, than the “recoverable amount” is equivalent to the value-in-use
• If the organization looks to sell off their asset, the “recoverable amount” is corresponding to their fair value subtracted by the “cost of disposal”.

Recoverable amount

It has to be noted that if the “fair value” of any asset subtracted by the “cost of disposal or the value of the asset” that is in used in higher than the carrying amount, then computation of the recoverable amount is not essential as the asset in this case is not required to be impaired (Linnenluecke et al. 2015).

The “recoverable amount” is calculated as follows:

“Recoverable Amount = Fair Value- Cost of Disposal”

Or

“Recoverable Amount = Value-in-Use”

Value-in-Use

“Value-in-use” is undertaken in order to explain the “present value of the cash flows” of the future that is attained from the utilisation of the asset. The organizations will ascertain the value-in-use of an asset as a section of a method that assesses if the value is impaired. If the organizations look to believe that the value of an asset needs to be impaired, then the company needs to undertake a formal projection of the recoverable amount (Penner, Kreuze and Langsam 2016). This process is very much similar to the idea of lower of cost or the market value, whichever is applicable to the inventory. IAS 36, in this circumstances have provided an explanation on this subject explaining that if the fair value of the asset subtracted by the cost of disposal is not ascertained, then the recoverable amount becomes equivalent to the value-in-use (Basu 2017). There are several factors that need to be considered when ascertaining the value-in-use and they are the discount rate, cash flow and others. The projections of the cash flow need to be reliant on the assumptions that are supportable that is inclusive of the current estimates along with the planning of the budget. As the organizations estimate budgets normally for five years only, the researchers are allowed to examine the data by going over the time period. The process of assessing the “value-in-use” is explained as follows:

“Value-in-use = Present Value of the benefits of an asset”

Fair value less cost of disposal

The “fair value less” of cost of disposal refers to the expenses that is incremental and is attributed directly to the removal of any kind of asset (Zhuang 2016). The “fair value less cost of disposal” is used with the help of which assessment of the “recoverable amount” and accordingly “fair value less cost of disposal” is used by the companies while undertaking impairment of the assets.

The current essay that has been constructed has tried to explain the “recoverable amount”, “value-in-use” and the “fair value less cost of disposal”. The essay has been able to explain the fact that all the three accounting terms are inter-related to each other and all of the three terms are used by the organizations at the time of undertaking impairment of their assets. These terms play a vital role and therefore all the companies look to assess these values in order to attain the value of the asset and the market value as well. The essay has therefore explained the process with the help of which these values are calculated.         

Reference List 

Basu, A., 2017. Impairment of Intangible Assets-An Effort to Convergence. International Journal of Engineering and Management Research (IJEMR), 7(5), pp.210-214.

Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.

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.

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.

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.

Price, J., 2015. The regulator: Understanding impairment. Company Director, 31(7), p.12.

Vanza, S., Wells, P. and Wright, A., 2018. Do asset impairments and the associated disclosures resolve uncertainty about future returns and reduce information asymmetry?. Journal of Contemporary Accounting & Economics, 14(1), pp.22-40.

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.

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