Recoverable amount is the higher of which two measures?

• A. Fair value less costs to sell and value in use
• B. Fair value and value in use
• C. Carrying value and fair value
• D. Value in use and net realizable value

Answer: (A)

When assessing impairment, the amount that can be recovered from an asset is the higher of two estimates: value in use and fair value less costs to dispose. Value in use is the present value of the expected future cash flows from using the asset (and eventual disposal), discounted at a rate that reflects the time value of money and the asset’s risks. Fair value less costs to dispose represents the price you would obtain from selling the asset in its current condition, in an orderly transaction, minus the costs of disposal.

Choosing the higher of these two ensures the asset is not written down below the most recoverable amount, whether that comes from continuing to use the asset or from selling it. If the asset’s carrying amount exceeds this recoverable amount, an impairment loss is recognized for the excess.

Note that fair value alone isn’t used because disposal costs must be subtracted, and net realizable value is an inventories concept not used for impairment of non-current assets.