Recoverable amount definition
/What is Recoverable Amount?
Recoverable amount is the greater of an asset's fair value less costs to sell, or its value in use. Fair value less costs to sell refers to the price at which an asset would sell on the market right now, minus any related selling costs (such as a commission). Value in use refers to the present value of future cash flows expected to be derived from an asset. Thus, the concept essentially focuses on the greatest value that can be obtained from an asset, either by selling or using it.
The recoverable amount concept is an integral part of the impairment analysis process. An impairment loss arises when an asset has a higher carrying amount than its recoverable amount. Conversely, if the asset has a lower carrying amount than its recoverable amount, then there is no asset impairment.
Example of Recoverable Amount
A company owns a piece of machinery used in its production process. The machinery's carrying amount is $500,000. The company conducts an impairment test and determines the following:
Fair value less costs of disposal. The machinery could be sold for $480,000, but after considering selling costs of $30,000, the net realizable value would be $450,000.
Value in use. The present value of future cash flows expected from using the machinery is $470,000.
The recoverable amount is the higher of these two figures. Thus, the recoverable amount is $470,000.