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How to calculate Recoverable amount, Value in use, Fair value less cost of disposal.

Recoverable Amount

The current essay takes into account the motive of providing an in-depth discussion of the procedure, which is used for computing the
value-in-use”, “recoverable amount’ and “fair value less disposal cost”. The organisations operating in the global economy aim to maintain their financial information appropriately and therefore, they are involved in preparing financial statements. This is because they plan to record all the associated assets and liabilities inherent in their business activities, processes and operations. Additional assistance needs to be provided in relation to the asset valuation for gaining an overview of the business profit in an appropriate manner (Badia et al. 2017). Hence, it mandates the need for all the business organisations to compute the above-stated items so that actual and authentic financial reports could be generated.

Recoverable amount could be considered as an accounting aspect, which is involved in addressing the market values of the assets. These values could be either greater or the value that the business organisations have reported being used in the existing the operational processes of the businesses. This concept is prevalent in the business organisations widely for gaining an understanding of the impairment associated with fixed assets (Barker and Penman 2016). This is taken into account in the form of optimum value, which is to be attained on the part of an asset. Two processes are present through which the recoverable amount could be calculated and these include either by utilising the business assets or by selling the asset.

The values of assets of an organisation are denoted by the present value of the projected future cash inflows, which is to be utilised by the assets. The asset value disposed or sold is denoted as the fair value of the assets subtracted by the amount spent in selling off the asset. The amount recovered between the greater of the two values is termed as the recoverable amount. This amount is immensely beneficial in order to undertake the impairment test. In addition to this, recoverable amount is considered as the greatest value, since the management of an organisation has the motive to choose that option, which has the ability to provide the optimum capability (Barker and Schulte 2017).

As per the accounting fundamentals, all the business organisations are needed to keep records within their balance sheet statements in circumstances at the time the carrying amount exceeds the recoverable amount. Various circumstances could be observed, in which at the time an organisation plans to estimate that the value of an asset is impaired, it introduces a formal projection of the amount expected to be recovered. The approach is feasible with the concept of minimising the expenses or minimisation in market worth related to the inventory. According to AASB 136 (IAS 36), it is necessary for the financial experts in undertaking the same and it has been addressed through various phases. If the fair values of the assets after subtracting the cost of disposal are not computed, no difference in value could be observed between recoverable amount and value-in-use (Goncharov, Riedl and Sellhorn 2014). Secondly, when the organisation decides to sell the assets, the recoverable amount becomes identical to the fair value after the subtraction of disposal expense.

Value-In-Use

In the words of Gordon and Hsu (2017), if the fair value of an asset obtained after subtraction of the cost of disposal and the worth of the asset used is higher opposed to the carrying amount, there is no need for computing the recoverable amount due to the fact that the asset is not required to be impaired. The recoverable amount could be computed with the help of the following formula:

Recoverable amount = Fair value - Disposal cost

Recoverable amount = Value-in-use

Value-in-use is prepared for defining the current worth of cash flows expected in future, which is developed through effective utilisation of assets. It is necessary for a business organisation to ascertain the value-in-use for an asset as a part of the process, which aims to identify whether the asset is needed to be impaired (Penner, Kreuze and Langsam 2016). If the organisation finds any indication that the asset is to be impaired, it needs to conduct an official projection of the amount, which is recoverable. This method is observed to be in tandem with the minimised net worth or minimisation in the overall expenditures. According to AASB 137 (IAS 36), it has been disclosed that if the fair value of the asset after deduction of the disposal cost is not developed, no difference could be found in the values of recoverable amount and value-in-use (Price 2015).

There are certain elements requiring special consideration for calculating the value-in-use and these elements primarily constitute of discount rate and cash flow. Estimations are extremely important for preparing the cash flow statement and the estimations could be in the form of planning and current projections. In this context, Sellhorn and Stier (2017) advocated that budgets are estimated for nearly or more than five years, which allows the financial analysts in evaluating the information within a limited timeframe. In order to calculate the value-in-use, the following formula is used:

Value-in-use = Present value of the asset benefits

Fair value less disposal cost signifies the expenses having incremental nature and the calculations are made by characterisation in order to remove assets (Tran et al. 2017). The fair value less disposal cost is necessary, since this is important in analysing recoverable value and the above-stated value is used by the organisations for impairment of assets.

All these three concepts are stated in AASB 136 and their measurement bases are provided as well. According to “Paragraph 19 of AASB 136”, it is not essential to ascertain the fair values of assets obtained from deduction of disposal cost and value-in-use. In case, any of these amounts is higher compared to the carrying amount of the asset, the asset is not impaired and the other amount need not be estimated (Aasb.gov.au 2018). In addition, it is not essential in ascertaining the fair value less disposal cost despite the fact there is no trading of a particular asset in the active market. However, difficulty might arise in calculating the fair value due to the absence of any base for developing a reliable estimate of the amount receivable from selling the asset between willing and knowledgeable parties.

Fair Value Less Disposal Cost


In compliance with “Paragraph 22 of AASB 136”, the ascertainment of recoverable amount is made for an individual asset, unless the asset fails to generate cash inflows, which do not have any sort of association with the other classes of assets in the organisation. In such case, the recoverable amount is ascertained for the cash-generating unit under which the asset falls. However, there are two exceptions to this case, where ascertainment is not possible. The first exception is that the fair value of the asset less disposal cost is greater than the carrying value. The second exception is that the value-in-use of the asset could be projected near to the fair value; however, it is not possible to determine the fair value.

According to “Paragraph 25 of AASB 136”, the evidence of the fair value of an asset less disposal cost is a price involved in an agreement of sale and it is adjusted with the incremental cost, which is attributable directly to the asset disposal. In case, the asset trades in the active market despite the absence of any agreement of sale, the value of the asset would be lower than the overall disposal cost. In this case, the bid price would be considered in the form of appropriate market price, as stated in “Paragraph 26 of AASB 136”. In case of unavailability of the current bid price, the price of the latest transaction might give a basis from which the fair value could be estimated. In addition, no significant changes are there in economic circumstances between the date of transaction and the date of estimation (Whittington 2015).

According to “Paragraph 26 of AASB 136”, there are several items that need to be taken into consideration for the value-in-use of the asset. These items constitute of projection of the future cash flows expected from the asset, expectations regarding the possible variations in the timing or amount of future cash flows, time value of money and illiquidity factors. In accordance with the accounting fundamentals, all the business organisations are needed to keep records within their balance sheet statements in circumstances at the time the carrying amount exceeds the recoverable amount. Various circumstances could be observed, in which at the time an organisation plans to estimate that the value of an asset is impaired, it introduces a formal projection of the amount expected to be recovered (Zhuang 2016).

Conclusion:

Measurement Bases for Recoverable Amount, Value-In-Use, and Fair Value Less Disposal Cost

Several explanations have been provided in this paper, which are in tandem with the questions raised and the enumeration of the financial terms addresses the fact that all the three items have direct relationship among each other, since these values are computed in an identical pattern. It could be observed that during asset impairment, the finance specialists primarily compute these values so that the organisations could obtain an overview of the optimal amount to be attained and the same could be used for ascertaining the asset value and market value of the asset.

The values of assets of an organisation are denoted by the present value of the projected future cash inflows, which is to be utilised by the assets. The asset value disposed or sold is denoted as the fair value of the assets subtracted by the amount spent in selling off the asset. The amount recovered between the greater of the two values is termed as the recoverable amount. This amount is immensely beneficial in order to undertake the impairment test. In addition to this, recoverable amount is considered as the greatest value, since the management of an organisation has the motive to choose that option, which has the ability to provide the optimum capability.


All these three concepts are stated in AASB 136 and their measurement bases are provided as well. It is not essential to ascertain the fair values of assets obtained from deduction of disposal cost and value-in-use. In case, any of these amounts is higher compared to the carrying amount of the asset, the asset is not impaired and the other amount need not be estimated. In addition, it is not essential in ascertaining the fair value less disposal cost despite the fact there is no trading of a particular asset in the active market. However, difficulty might arise in calculating the fair value due to the absence of any base for developing a reliable estimate of the amount receivable from selling the asset between willing and knowledgeable parties.

Particulars

Amount (in $)

Assets' carrying amount (A)

                          434,200

Value-in-use of the division (B)

                          389,200

Fair value of the assets ( C)

                          281,276

Actual or real asset values (D) [Greater of (B) and (C)]

                          389,200

Loss from Impairment  (E) (A) - (D)]

                             45,000

Goodwill

                             15,000

Impairment loss from subtraction of goodwill (E) - (F)

                             30,000

Apportionment of Impairment Loss:-

Particulars

Carrying amount (in $)

Pro-rata

Impairment Loss Allocated (in $)

Adjusted Carrying Amount (in $)

Goodwill

                15,000

           15,000

Equipment

             292,000

69.69%

      10,453.46

  281,546.54

Copyright

                67,000

15.99%

        2,398.57

     64,601.43

Machinery

                42,000

10.02%

        1,503.58

     40,496.42

Inventory

                18,000

4.30%

           644.39

     17,355.61

Total

             419,000

100%

           30,000

                 -   

In the books of Alex Limited

Journal Entry as on 30 June 2015

Date

Debit

Credit

Particulars

Amount (in $)

Amount (in $)

30-Jun-15

Impairment Loss Account…………...Dr

           30,000

             To Goodwill Account

           15,000

             To Equipment Account

      10,453.46

             To Copyright Account

        2,398.57

             To Machinery Account

        1,503.58

             To Inventory Account

           644.39

(Net assets and goodwill impaired based on the recovery amount)

30-Jun-15

Income Statement Account………………..Dr

           30,000

            To Impairment Loss Account

           30,000

(Value of impairment loss reallocated to the income statement)

References:

Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf [Accessed 26 May 2018].

Badia, M., Duro, M., Penalva, F. and Ryan, S., 2017. Conditionally conservative fair value measurements. Journal of Accounting and Economics, 63(1), pp.75-98.

Barker, R. and Penman, S., 2016. Moving the conceptual framework forward: Accounting for uncertainty. Unpublished paper, Oxford University and Columbia University.

Barker, R. and Schulte, S., 2017. Representing the market perspective: Fair value measurement for non-financial assets. Accounting, Organizations and Society, 56, pp.55-67.

Goncharov, I., Riedl, E.J. and Sellhorn, T., 2014. Fair value and audit fees. Review of Accounting Studies, 19(1), pp.210-241.

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.

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.

Sellhorn, T. and Stier, C., 2017. Fair Value Measurement for Long-Lived Operating Assets: Research Evidence.

Tran, M.D., Doan, V.A., Bui, T.T. and Nguyen, M.C., 2017. Are Audits of Financial Statements Born Unequal?. Asian Business Research, 2(3), p.16.

Whittington, G., 2015. Fair value and IFRS. The Routledge Companion to Financial Accounting Theory, pp.217-235.

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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