Recoverable amount
AccountingUnder IAS 36, the higher of an asset's fair value less costs of disposal and its value in use, and the figure its carrying amount is tested against.
Also written: recoverable amount under IAS 36
IAS 36 requires an asset or cash generating unit to be written down when its carrying amount exceeds what the entity could recover from it. Recovery can happen two ways, by selling the asset or by continuing to use it, so the standard takes the higher of the two: fair value less costs of disposal, and value in use.
Taking the higher is deliberate and worth understanding. An entity that could sell an asset for more than it is worth in continued use would rationally sell it, and one that gets more from using it would keep it. Only if both routes fall short of the carrying amount has value genuinely been lost.
The practical consequence for a valuation candidate is that the two limbs are prepared on different bases and can differ legitimately. Fair value less costs of disposal is a market participant measure, so it may reflect plans a buyer would bring. Value in use is entity specific and constrained, built on the asset in its current condition.
This is why an impairment charge is not a claim that a disposal at a higher price is impossible, and why an impairment model and a deal model on the same asset can produce different numbers without either being wrong. Knowing that distinction is unusual in a candidate and lands well.
Worked example
A cash generating unit is carried at 500. A buyer would pay 460, and disposal costs would be 10, so fair value less costs of disposal is 450.
Value in use, on the unit as it stands, is 470. The recoverable amount is the higher figure, 470, and the impairment is 30 rather than 50.
If instead value in use were 430, the recoverable amount would be 450 and the impairment 50, because the sale route recovers more.