What is the difference between fair value less costs of disposal and value in use when determining recoverable amount under IAS 36?

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AcadiFi · Accepted Answer

The recoverable amount is the gatekeeper of the IAS 36 impairment test. Understanding the two components — and when each dominates — is critical for CFA Level II. **Definitions** - **Fair value less costs of disposal (FVLCD):** The price that would be received to sell the asset in an orderly transaction between market participants, minus incremental disposal costs (commissions, legal fees, removal costs). - **Value in use (VIU):** The present value of estimated future cash flows expected from the asset's continued use and ultimate disposal, discounted at a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks. **Worked Example — Pemberton Industrial Corp:** Pemberton owns a specialized manufacturing facility. Two valuations are prepared: *Fair Value Less Costs of Disposal:* An independent appraiser values the facility at $34 million based on comparable industrial sales. Legal and broker fees for disposal are estimated at $1.2 million. *Value in Use:* Management projects the following cash flows from continued operation: | Year | Projected Cash Flow | PV Factor (9%) | Present Value | |---|---|---|---| | 1 | $6,200,000 | 0.9174 | $5,688,000 | | 2 | $6,800,000 | 0.8417 | $5,724,000 | | 3 | $7,100,000 | 0.7722 | $5,483,000 | | 4 | $5,900,000 | 0.7084 | $4,180,000 | | 5 | $5,200,000 + $8M residual | 0.6499 | $8,579,000 | | **Total VIU** | | | **$29,654,000** | | Measure | Amount | |---|---| | Fair value less costs of disposal | $32,800,000 | | Value in use | $29,654,000 | | **Recoverable amount (higher)** | **$32,800,000** | \`\`\`mermaid flowchart LR A["Recoverable Amount"] --> B["Fair Value Less
Costs of Disposal"] A --> C["Value in Use"] B --> D["$32.8M"] C --> E["$29.7M"] D --> F["Higher = $32.8M
= Recoverable Amount"] E --> F \`\`\` **When Each Measure Dominates:** - **FVLCD dominates** when the asset has an active resale market and its market value exceeds the present value of internal cash flows (common for real estate, commodity assets). - **VIU dominates** when the asset is specialized, has no active market, or generates synergies that a third-party buyer would not capture (common for integrated production equipment). **Practical Note:** If either measure alone exceeds the carrying amount, no impairment exists — you do not need to calculate both. **Exam Distinctions:** 1. VIU uses **entity-specific** assumptions; FVLCD uses **market participant** assumptions. 2. VIU excludes future restructuring and capital expenditures that enhance the asset. FVLCD reflects the asset as-is. 3. The discount rate for VIU must be **pre-tax** and reflect risks not already adjusted in cash flows. 4. US GAAP does not use "recoverable amount" — it uses a two-step undiscounted/fair-value model instead. Explore detailed IAS 36 walkthroughs in our CFA Level II FRA course.

What is the difference between fair value less costs of disposal and value in use when determining recoverable amount under IAS 36?

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