Measurement of Recoverable Amount

Recoverable Amount is the higher of an asset’s net selling price and its value in use.

Recoverable amount for an asset is defined by the statement as the higher of net selling price or value of use whichever is higher. If there is no reason to believe that an asset’s value in use materially exceeds its net selling price, the asset’s recoverable amount may be taken to be its net selling price. This will often be the case for an asset that is held for disposal. Otherwise, if it is not possible to determine the selling price one takes value in use of assets as its recoverable amount.

Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows from continuing use that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs, unless either:

  • The asset’s net selling price is higher than its carrying amount; or
  • The asset’s value in use can be estimated to be close to its net selling price and net selling price can be determined.

Net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.

Costs of disposal are incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense.

The best evidence for net selling price is a price in the bidding sales agreement for the disposal of the assets or similar assets. In the absence of this net selling price is estimated from the transactions for the assets in active market, if the asset has the active market. If there is no binding sale agreement or active market for an asset, net selling price is based on the best information available to reflect the amount that an enterprise could obtain, at the balance sheet date, for the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal.

Value in Use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

Estimating the value in use of an asset involves the following steps:

  • Estimating the future cash inflows and outflows arising from continuing use of the asset and from its ultimate disposal; and
  • Applying the appropriate discount rate to these future cash flows.

An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount

Carrying amount is the amount at which an asset is recognised in the balance sheet after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.

Depreciation (Amortisation) is a systematic allocation of the depreciable amount of an asset over its useful life.

Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.

Useful life is either:

  • The period of time over which an asset is expected to be used by the enterprise; or
  • The number of production or similar units expected to be obtained from the asset by the enterprise.
Basis for Estimates of Future Cash Flows

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