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Part A: Essa



The current scenario in economic condition has produced uncertainty and offer spotlight on the impairment. It has been found that, lots of entities have found to be decided to reassess their existing impairments process of testing, assumption and models. The standard, at every reporting date needs an entity in order to assess, whether there are any sort of indicators that can help the assets to be impaired. It can be said that, an entity is necessary in order to generate information from internal sources such as physical damage of the asset or internal restructuring along with the external sources such as legal, market, economic and technological aspects.


Calculation of Recoverable Amount

The recoverable amount related to the asset can be the greater in relation to the fair value less cost to sell. In order to measure the impairment, it has been observed that, the carrying amount of the asset is being compared with the recoverable amount. The recoverable amount is found to be illustrated for the assets that are individual in nature. However, it has been found that, if the assets failed to generate the inflows cash which are found to be largely independent of other assets, the recoverable amount is identified (Huikkuet al. 2017). Recoverable amount can be determined as the greater of fair value asset. Here, the value can be used in order to highlight the current or existing value of future cash flows that is to be expected or generated from the asset. Therefore, it can be said that, the concept of recoverable amount can be used in order to maintain the global financial standards of reporting framework. The basic formula of Recoverable amount or to calculate the recoverable amount we have follow, Recoverable Amount = Fair Value - Cost of Disposal. Here, Fair value can be determined as the price that need to be received while selling any asset. Cost of disposal can be illustrated as the incremental expenses that found to be directly attributed to asset removal. According to the accounting principles, the companies need to keep record on their balance sheet where the carrying amount related to the asset found to have exceeds the recoverable amount. As for the example, if any company consisting of any reason to believe value of the asset may impaired, it needs to develop a formal estimate related to the recoverable amount. It is found that, the approach is same to the concept but it lower the cost of market value. If it is observed that, the fair value of the asset in lees to the cost of disposal, it cannot be determined. Then the recoverable amount will be considered as equal to the value in use. If it is found that, the company has the intention in order to sell the asset, then the recoverable amount will be equal to the fair value which is lesser than the disposal cost.


Value in use

VIU or Value in use can be determined as the current value of the cash flows in future which is expected to be defined from the CGU or the asset. The value in use calculations follows several factors. Firstly, the follows the cash flow projections. Cash flow projection can be derived as the estimate of the cash flows in future where the entity found to have expectation to generate from the asset. The expectation related to the possible variations in the timing or amount of cash flows in future. Secondly, it follows the discount rate (Lind and Arvidsson, 2014). It follows the time value related to the money. It can be treated as a pretax discount rate that highlights the assessments of current market of time value of the money and specific risk to the asset for which future estimation of cash flows have not adjusted. The price in order to bear the uncertainty inherent in the asset that can help to reflect in either in discount rate or in the cash flow estimate. There are few other factors which are followed by the value in use. They are market participation, illiquidity that tend to reflect in the pricing of cash flow in future that flows the entity which expects from the assets which have been derived.

While measuring the VIU, it is necessary to follow certain steps. Firstly, the cash flows should be based on the supportable and reasonable assumption that produce the best estimate of management related to the set of economic condition. Secondly, it should be based on the current financial forecast and budget which is approved by the management which is excluding the outflows or inflows of cash from the restructuring of future. It should have excluded the borrowing costs, the income tax payments as well as capital expenses that will help to bring improvement or enrich the performance of the asset. It should consist of the overheads which are allocated on a consistent and reasonable basis. The amount of transaction costs is expected to be at the end of the useful life of the asset.



Huikku, J., Mouritsen, J. and Silvola, H., (2017). Relative reliability and the recognisable firm: Calculating goodwill impairment value. Accounting, Organizations and Society, 56, pp.68-83.

Bond, D., Govendir, B. and Wells, P., (2016). An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.




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