Key Points
- Fair value less costs of disposal represents what the market would pay for the asset today, not what management expects to extract through continued use.
- Costs of disposal include only incremental costs directly attributable to the sale (legal fees, stamp duty, removal costs, similar direct charges) and exclude restructuring or employee termination benefits.
- IAS 36.20 permits the entity to skip this measure entirely if value in use already exceeds the carrying amount.
- When a binding sale agreement exists, fair value is the agreed price minus disposal costs, making the measurement straightforward and largely free of estimation uncertainty.
What is Fair Value Less Costs of Disposal?
IAS 36.25 establishes a measurement hierarchy. The best evidence is a price in a binding sale agreement in an arm's length transaction, adjusted for incremental disposal costs. Where no binding agreement exists, the entity looks for a market price in an active market (the bid price, or the most recent transaction price if trading is infrequent). Failing both of those, the entity estimates the amount obtainable from an orderly sale between knowledgeable, willing parties at the measurement date, using the best information available (IAS 36.27). Since 2013, IAS 36.BCZ17 has confirmed that the fair value measurement follows IFRS 13, which means the fair value hierarchy applies: Level 1 quoted prices in active markets sit at the top, followed by Level 2 observable inputs. Level 3 unobservable inputs are used only when no higher-level evidence is available.
Costs of disposal are narrowly defined. IAS 36.28 lists legal costs, stamp duty, similar transaction taxes, costs of removing the asset, and direct incremental costs to bring the asset into condition for sale. It explicitly excludes termination benefits under IAS 19 and costs of reducing or reorganising a business after disposal. Including restructuring costs would systematically understate fair value less costs of disposal and bias the impairment test toward recognising losses that do not reflect the asset's market value.
Worked example: Rossi Alimentari S.p.A.
Client: Italian food production company, FY2025, revenue €67M, IFRS reporter. Rossi operates a pasta-drying facility in Campania that has been idle for six months following a shift to outsourced production. The facility's carrying amount is €4,200,000. Management has identified impairment indicators under IAS 36.12 (cessation of use) and elects to measure fair value less costs of disposal because the asset no longer generates cash flows, making a value-in-use calculation impractical.
Step 1 — Identify the fair value input
Rossi obtains two independent broker opinions for the facility (land, building, production equipment, and specialised drying lines). Broker A values the property at €3,600,000 based on comparable transactions for industrial food-processing sites in southern Italy. Broker B values it at €3,400,000 using the same comparables but applies a discount for the specialised fit-out that limits the buyer pool. No binding sale agreement exists and no active market provides quoted prices. The measurement is Level 3 under IFRS 13.
Step 2 — Select the fair value estimate
Management adopts €3,500,000 (the midpoint of the two broker opinions). The auditor evaluates whether this point estimate falls within a reasonable range per ISA 540.18 and corroborates the comparables against publicly available Italian industrial property transactions.
Step 3 — Deduct costs of disposal
Rossi estimates disposal costs at €185,000, comprising €40,000 in legal and notarial fees (standard for Italian property transactions), €95,000 for equipment removal, €50,000 in stamp duty (imposta di registro at the applicable rate), and no other incremental items. Restructuring and employee termination costs are excluded per IAS 36.28.
Step 4 — Determine fair value less costs of disposal and compare to carrying amount
Fair value less costs of disposal is €3,500,000 minus €185,000, producing €3,315,000. The carrying amount of €4,200,000 exceeds this by €885,000.
Conclusion: the Campania facility's fair value less costs of disposal of €3,315,000 produces an impairment loss of €885,000, supported by two independent broker opinions and documented disposal cost estimates from identifiable third-party sources.
Why it matters in practice
Teams frequently include restructuring costs or redundancy payments in the costs of disposal, which IAS 36.28 explicitly prohibits. This error understates fair value less costs of disposal and can trigger an impairment loss that would not exist under a correct calculation. ISA 540.13(a) requires the auditor to evaluate whether the entity's method is appropriate, which includes verifying that the cost deduction contains only incremental disposal costs.
When no binding sale agreement or active market exists, practitioners sometimes accept a single management estimate without corroborating evidence. IAS 36.27 requires the measurement to reflect the best information available. ISA 540.18 requires the auditor to evaluate the reasonableness of the point estimate, which is difficult without at least one independent data point (a broker opinion or comparable transaction).
Fair value less costs of disposal vs. value in use
| Dimension | Fair value less costs of disposal | Value in use |
|---|---|---|
| Perspective | Market participant (what a buyer would pay) | Entity-specific (what the entity expects to extract through continued use) |
| Inputs | Market prices, broker opinions, comparable transactions, industry benchmarks | Management cash flow projections, discount rate, terminal value, sensitivity analysis |
| Discount rate | Implicit in the market price; explicit only when an income approach is used under IFRS 13 | Pre-tax rate reflecting risks specific to the asset (IAS 36.55) |
| Cash flow scope | Excludes entity-specific synergies unless a market participant would also achieve them | Includes entity-specific synergies and restructuring benefits if committed |
| When preferred | Asset held for disposal, idle asset, reliable market evidence available | Asset in active use, no market comparables, management projections available |
Choosing the wrong measure can mask or manufacture an impairment loss. Accepting a value-in-use calculation for an idle asset overlooks that fair value less costs of disposal is the only applicable measure. Defaulting to fair value less costs of disposal for a specialised asset with no comparable market data introduces Level 3 estimation risk that a value-in-use model would avoid.
Related terms
Frequently asked questions
Does fair value less costs of disposal include tax on the sale?
Only transaction taxes that are incremental to the disposal. IAS 36.28 includes stamp duty and similar transaction taxes in costs of disposal. Income tax on a gain from selling the asset is not a cost of disposal because it is not incremental to the transaction. Deduct transfer taxes and duties; exclude corporate income tax.
When should I use fair value less costs of disposal instead of value in use?
Use it when the asset is held for disposal or when the asset no longer generates independent cash flows that would support a value-in-use calculation. It is also the faster route when reliable market data exists (a binding offer, an active market, broker opinions, or comparable transaction data), because IAS 36.21 notes that fair value less costs of disposal does not always require a detailed discounted cash flow model.
Can fair value less costs of disposal exceed value in use?
Yes. This happens when the market values the asset more highly than management's projections suggest, often because the highest and best use under IFRS 13.28 differs from the entity's current use. Recoverable amount then equals fair value less costs of disposal, which reduces or eliminates the impairment loss.