Under IFRS impairment testing, what is the recoverable amount?

• A. The lower of fair value less costs to dispose and value in use.
• B. The market price of asset.
• C. The book value of assets minus depreciation.
• D. The higher of fair value less costs to dispose and value in use.

Answer: (D)

Recoverable amount is the amount you could recover from an asset by either using it or selling it, whichever is higher. In IFRS, this means you take the greater of two estimates: value in use and fair value less costs to dispose. Value in use represents the present value of the expected future cash flows from the asset in its continued use, including its eventual disposal, based on current assumptions and discounting at a pre-tax rate that reflects time value and risks. Fair value less costs to dispose is the estimated price obtainable from selling the asset in an orderly transaction, net of the costs to dispose.

So the recoverable amount is the higher of these two figures. This is why it’s not simply the market price, nor the asset’s book value minus depreciation, nor the lower of the two values. If the carrying amount exceeds the recoverable amount, impairment is recognized for the difference.