How To Calculate The Recoverable Amount Of The Assets?


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Beth Kennedy Profile
Beth Kennedy answered
The recoverable amount of assets is the higher figure of an asset's fair value minus costs to sell, otherwise known as net selling price, and its value in use where
fair value is the amount obtainable from the sale of an asset in a transaction between knowledgeable parties. Recoverable amount of assets can be calculated in a number of steps:

  • Determining Recoverable Amount
  • Fair value minus costs to sell
  • Value in use
  • Cash flow projections
Determining the recoverable amount of assets begins if fair value minus costs to sell or value in use exceeds the carrying amount. If fair value minus costs to sell cannot be calculated, then the recoverable amount is the value in use amount. For assets you need to get rid of, the recoverable amount is calculated with fair value minus costs to sell.

When working out fair value minus costs to sell you must consider if there is a binding sale agreement or sale contract. If this is the case then use the price made under the agreement minus costs of disposal. However, if there is a readily active market for that type of asset, you should use market price minus costs of disposal. Market price is the current bid price if it's available; otherwise use the price in the most recent transaction. If there is no active market, then use the best guess of the asset's selling price minus costs of disposal. The costs of disposal are the direct added costs.

You must then calculate the value in use. The calculation of value in use should involve the estimate of future cash flows expected from the asset, the expectations of variations in timing or future cash flows and the price for bearing the uncertainty inherent in the asset. Other factors including liquidity, should be included.

Lastly, cash flow projections should be calculated on reasonable assumptions. Five years is the cut off point for budgets and forecasts. The most recent budgets and forecasts should be used if possible. The differences between past cash flow projections and actual cash flows should be determined. Estimates of cash flows in the suture should not include cash inflows/outflows from financing activities, or income tax receipts or payments.

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