Recoverable Amount

Under IFRS, an asset should not be carried in the accounts at more than the company can recover from it, either by selling it or by continuing to use it. The recoverable amount captures the better of these two options.

Fair value less costs to sell is what the asset could be sold for in an orderly sale, minus selling costs. Value in use is the present value of the future cash flows the company expects from using the asset.

For example, a factory has a carrying amount of 1,000. It could be sold for 700 after costs, and its value in use is estimated at 820. The recoverable amount is the higher figure, 820. Because this is below the carrying amount, the company records an impairment loss of 180.

Impairment tests are often done for groups of assets that produce cash together, called cash-generating units, especially for goodwill. US GAAP uses a different approach for most long-lived assets, first testing whether undiscounted cash flows cover the carrying amount, and then measuring any impairment against fair value.