Under IAS 36, recoverable amount is the higher of an asset's fair value less costs of disposal and its value in use.
Under IAS 36 Impairment of Assets, recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs of disposal and value in use. If carrying amount exceeds recoverable amount, the asset or unit is impaired and is written down under the standard’s recognition and allocation rules.
Recoverable amount is not the higher of net realizable value and value in use. Net realizable value is a different measurement used primarily for inventory under IAS 2. Confusing the two can produce the wrong impairment conclusion.
For an asset or cash-generating unit:
The impairment loss is:
The use of the higher amount reflects two possible recovery paths: sale to market participants or continued use by the entity. Management does not select whichever amount produces a preferred result; each measure must follow its own assumptions and evidence requirements.
Fair value less costs of disposal (FVLCD) starts with the price obtainable in an orderly transaction between market participants at the measurement date and subtracts costs directly attributable to disposal.
Evidence can include:
Fair value is not reduced for every cost caused by closing or restructuring a business. Analysts should separate direct disposal costs from expenses that would arise whether or not the asset were sold.
Value in use (VIU) is the present value of future cash flows expected from continuing to use the asset in its current condition and from its ultimate disposal. A simplified expression is:
where CF_t represents expected operating cash flows, D_n represents expected disposal proceeds at the end of the projection period, and r is the discount rate consistent with the cash-flow assumptions.
Under current IAS 36 requirements, value-in-use estimates reflect the asset in its current condition and use a pre-tax discount rate reflecting the time value of money and asset-specific risks not already included in cash flows. Cash flows and discount rates must be internally consistent so inflation, currency, and risk are not double counted.
VIU is not simply management’s most optimistic business plan. Forecasts should be supportable, reconcile with approved budgets and current performance, and distinguish committed actions from future improvements that are not part of the asset’s current condition.
Assume a cash-generating unit has a carrying amount of 12.0 million, including 0.9 million of goodwill. Management estimates:
10.2 million;0.4 million; and10.6 million.Fair value less costs of disposal is:
Recoverable amount is the higher of 9.8 million and 10.6 million:
The impairment loss is therefore:
If the unit contains goodwill, IAS 36 allocates the impairment to goodwill first. In this simplified case, goodwill falls from 0.9 million to zero, and the remaining 0.5 million loss is allocated pro rata to the unit’s other in-scope assets, subject to the standard’s allocation floors.
Using 9.8 million, the lower of the two measures, would incorrectly produce a 2.2 million impairment. The error would overstate the loss by 0.8 million.
IAS 36 does not always require both calculations. If one measure is reliably estimated above carrying amount, recoverable amount must also exceed carrying amount, so no impairment exists.
For example, if an asset’s carrying amount is 5.0 million and observable FVLCD is 5.4 million, a VIU model is unnecessary for that test. This avoids a complex forecast when sale-based evidence already establishes adequate recovery.
If FVLCD cannot be estimated reliably because there is no basis for an orderly market-participant sale estimate, VIU may serve as recoverable amount. Conversely, FVLCD may be sufficient for an asset held for disposal when cash flows from continued use before sale are negligible.
Recoverable amount is determined for an individual asset when the asset generates cash inflows that are largely independent. If it does not, testing generally occurs at the cash-generating unit (CGU), the smallest group producing largely independent cash inflows.
Examples include:
Unit definition matters. Combining a weak operation with an unrelated profitable operation can conceal impairment, while testing at a level below independent cash inflows can create unsupported allocations.
At each reporting date, an entity considers external and internal indicators that an in-scope asset may be impaired. Indicators can include:
The following require recoverable-amount assessment annually even without an impairment indicator:
The annual test can occur at a consistent time during the year, subject to the detailed timing requirements of the applicable standard.
IAS 36 applies broadly to non-financial assets but excludes assets whose impairment is addressed by another IFRS Accounting Standard.
| Item | Primary impairment or measurement framework |
|---|---|
| Property, plant, equipment, many intangible assets, goodwill, and relevant CGUs | IAS 36 recoverable amount |
| Inventory | IAS 2 lower of cost and net realizable value |
| Financial assets within IFRS 9 | IFRS 9 expected-credit-loss or other applicable measurement requirements |
| Deferred tax assets | IAS 12 recognition and recoverability requirements |
| Investment property measured at fair value | IAS 40 fair-value requirements |
| Biological assets measured at fair value less costs to sell | IAS 41 measurement requirements |
| Non-current assets classified as held for sale | IFRS 5 measurement requirements |
This is why calling recoverable amount a generic IFRS-and-GAAP valuation rule is inaccurate. The asset type and reporting framework must be identified first.
| Measure | Meaning | Key distinction |
|---|---|---|
| Recoverable amount | Higher of FVLCD and VIU under IAS 36 | Selects the stronger of sale and use recovery paths |
| Net Realizable Value | Estimated ordinary-course selling price less completion and selling costs | Primarily an inventory measure under IAS 2 |
| Fair Value | Market-participant exit price in an orderly transaction | Does not itself subtract disposal costs |
| Value in use | Entity-specific present value from continued use and ultimate disposal | Uses the entity’s expected use rather than market-participant assumptions |
| Liquidation Value | Estimated proceeds from piecemeal sales in a wind-down | Depends on orderly or constrained liquidation assumptions |
| Carrying Amount | Amount recognized on the balance sheet after applicable adjustments | Compared with recoverable amount to determine impairment |
When carrying amount exceeds recoverable amount, IAS 36 generally recognizes the impairment loss immediately in profit or loss, unless another standard treats it as a decrease for a revalued asset.
For a CGU, the loss reduces:
For assets other than goodwill, a prior impairment can be reversed when the estimates used to determine recoverable amount improve. The revised carrying amount cannot exceed what carrying amount would have been, net of depreciation or amortization, had no impairment occurred. An impairment loss recognized for goodwill is not reversed under IAS 36.
Recoverable amount can be highly sensitive to forecasts, terminal growth, discount rates, market comparables, disposal costs, CGU boundaries, and goodwill allocation. A small assumption change can eliminate headroom or create a material impairment without changing current-period cash flow.
Accounting requirements can change, and U.S. GAAP, local standards, regulatory reporting, tax valuation, and transaction valuation may use different models. This page provides general financial education and does not provide accounting, audit, tax, legal, valuation, or investment advice.