Definition of Recoverable Amount in Impairment Accounting

Every company having assets in their balance sheet has to deal with concept of recoverable amount which has been determined using principles and concepts as laid in AASB 136/IAS 36 – Impairment of Assets.  

According to Australian Accounting Standard Board 136 which deals with impairment of Assets, the recoverable amount for financial accounting implies the greater of market value of an asset under consideration or currently used value provided to company and its management. This term of recoverable used in calculation of impairment loss/ gain for an asset so that value of an asset can be shown correctly (AASB, 2017).

Accounting to accounting theories and governing principles as defined in Australian Accounting standards, every company has to disclose and report the situations where the asset whose carrying amount or cash generating units whose carrying amount exceeds the amount which the asset or the cash generating unit will fetch in the normal market. In case, company management has reason to assume that asset value will be impaired, then recoverable amount estimated is required.  Calculation of recoverable amount is based on the same concept on which valuation of inventory has been done that is cost or net realizable value whichever is lower. AASB 136 states that:-

• If in case of the asset whose net fair value which means fair value minus the disposing cost is not determinable, then the amount which is recoverable  from the asset will be equivalent to value in use
• And if intention of the concern is to dispose of the asset in coming years, then the amount which is recoverable from the asset will be equivalent to the net fair value.

Recoverable amount is only necessary and calculated when fair value minus disposing cost or value in use is more than the value shown in books of the concerned asset or cash generating unit otherwise the recoverable amount calculation is not required as there is no need of asset or CGU impairment (Reinstein and Lander, 2004)

As per generic terms the recoverable amount is the amount which can be recovered on selling of the product. In accordance with the Australian accounting standard number 136, the recoverable amount is defined as the value which is having larger value from below items:-

VIU – value in use

Net fair value

As per the above equation, fair amount is market value of an asset which can be received after selling an asset. And Cost of Disposal is increased expenditure which is required and directly associated to dismantling of asset (Parker, 2014)

Recoverable amount has been calculated for individual assets in case of checking for its impairment. Where asset is not generating the inflows which are majorly not dependent from other concerned assets, recoverable amount will arrived for Cash generating unit to which the particular or specific assets fit in. Cash generating unit is least identifiable asset group that make inflows of which are not dependent of inflows of cash and its equivalents from other assets or its group.

It is the major part of the impairment calculation. Value in use refers to the value which is calculated by having present values of cash flows which have been estimated for the future from individual asset or the individual cash generating unit. The cash flows are estimated on the basis of the past experience of the company along with the figures of the base year for the company (Sooriyakumaran and Thirunavukkarasu, 2013) 

Calculation of Recoverable Amount using Value in Use

The value in use is calculated using the following formula:-

Value in Use

= Present value factor using appropriate discount rate X Expected cash flows in future

In the above the expected cash flows in future refers to the estimated cash flows that the assets will generate in future which is expected by an entity which are variable in amount or timing for cash flows are uncertain.

Appropriate discount rate is the pre tax discount rate which has been used to show running market scenario which includes value for time in terms of money and associated risks not adjusted for future cash flows.

When VIU consider as recoverable amount in calculation of impairment and recoverable amount which is value in use is lesser than the carrying value of asset, then fair value less cost of disposal is required to calculate.

Fair value means price which has been decided among buyer and seller with mutual consent in a transaction where it buyer and seller are fully aware about each facts and are free to enter into transaction. According to International Financial Reporting Standard Board, fair value means the amount coming from disposing an asset or paying a obligation in normal event in which market members are involved on particular date which can be used specifically for financial statements over a period of time (Xu, Anandarajan and Curatola, 2011)

It is an amount or cost which is needed and required to paid or incurred to create the situation of sale of an asset. It is an associated cost which is out of control and that are necessarily incurred to have the sale of an asset to be done at fair value.

It has been calculated by subtracting the below item:-

Where market price of the specific assent or cash generating units is not available, then fair value less cost of disposal of asset or CGU will calculated using Discounted cash flow approach.

Abc Ltd has purchase a car for $ 1000000 on 1^st June, 2015. On 30^th June, 2016, the book value of car is $ 900000. The company got offer from Mr. A who is willing to buy the car for $ 800000. The company has to incur the cost of transportation of car to Mr. A of $ 50000.

In this case,

Thus, Recoverable Amount will be Fair Value less Cost of Disposal = $ 750000.

Let us assume, in the example the value of the future cash inflows in the present term has been given as $ 800000.

Then, Amount which will be recoverable from the asset will be

• Fair value minus cost of disposal = $ 750000
• VIU = $ 800000

Maximum of the abovementioned figures = $ 800000 is amount which will be recovered for calculation of loss due to impairment.

References

AASB Official Website, (2017), “AASB-136, Impairment of Assets” available at https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf accessed on 17/05/2018

EY Official Website, (2010), “Impairment Accounting – the basics of IAS 36 Impairment of Assets available at https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf accessed on 17/05/2018

Parker C, (2014), “Accounting for Impairment of Asset”, available at https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=https://www.tved.net.au/PublicPapers/July_2014,_Corporate_Education_Channel,_Accounting_for_Impairment_of_Assets___Part_1.html accessed on 17/05/2018

Reinstein, A. and Lander, G.H., (2004) Implementing the impairment of assets requirements of SFAS No. 144: An empirical analysis Managerial Auditing Journal, 19(3), pp.400-411

Sooriyakumaran, L. and Thirunavukkarasu, V., 2013, Disclosures and impacts of impairment of non-current assets in the financial statements: A study on listed manufacturing companies in Colombo Stock Exchange (CSE) in Sri Lanka.

Xu, W., Anandarajan, A. and Curatola, A., 2011, the value relevance of goodwill impairment Research in Accounting Regulation, 23(2), pp.145-148