Key Takeaways
- Value in use reflects entity-specific cash flow projections; fair value less costs of disposal reflects what an external buyer would pay.
- The entity needs only one measure if it already exceeds carrying amount (IAS 36.19 shortcut).
- A one-percentage-point shift in the pre-tax discount rate can swing value in use by 8%–12% on a five-year projection.
- Use fair value less costs of disposal when the asset is idle or held for sale; use value in use when the asset generates contracted cash flows.
What is IAS 36 Value in Use vs Fair Value Less Costs of Disposal?
| Dimension | Value in use | Fair value less costs of disposal |
|---|---|---|
| Perspective | Entity-specific: what management expects to extract through continued use | Market-based: what a willing buyer would pay in an orderly transaction |
| Cash flow source | Management projections anchored to board-approved budgets (IAS 36.33) | Market participant expectations or observable transaction prices |
| Discount rate | Pre-tax rate reflecting asset-specific risks (IAS 36.55) | Implicit in the market price, or derived from market participant assumptions under IFRS 13 |
| Synergies | Includes entity-specific synergies already present in the asset's use | Excludes entity-specific synergies unless a market participant would also capture them |
| Projection cap | Five years unless longer forecasts are demonstrably reliable (IAS 36.35) | No fixed cap; measurement follows IFRS 13 hierarchy |
| When it dominates | Specialised assets with stable internal cash generation but no active resale market | Assets with an active market, recent comparable transactions, or binding sale agreements |
Decision rule: Use value in use when the asset remains in productive operation and management has documented cash flow projections. Use fair value less costs of disposal when the asset is idle, held for sale, or when reliable market evidence (a binding offer, broker opinions, or comparable transactions) makes the measurement faster and less dependent on management assumptions.
When the distinction matters on an engagement
The choice between the two measures determines where audit risk concentrates. An entity that defaults to value in use for every impairment test puts all estimation risk into the discount rate and terminal value. IAS 36.55 requires a pre-tax discount rate, yet the FRC's 2023 thematic review found that entities routinely used a post-tax rate without a proper gross-up. When that happens, value in use is overstated and impairments stay hidden.
Fair value less costs of disposal carries different risks. Without a binding sale agreement, the entity relies on Level 3 inputs under IFRS 13, which introduces estimation uncertainty of its own kind. IAS 36.28 also traps practitioners who deduct restructuring costs or termination benefits from the sale price. Those items are not incremental disposal costs, and including them understates fair value less costs of disposal. ISA 540.13(a) directs the auditor to evaluate whether the entity's method (including which of the two measures was selected) is appropriate for the asset's circumstances.
Worked example: Hoffmann Maschinenbau GmbH
Client: German engineering company, FY2025, revenue EUR 28M, HGB reporter also preparing IFRS group reporting. Hoffmann owns a CNC milling centre with a carrying amount of EUR 1,850,000 at 31 December 2025. The machine's order backlog has fallen by 35% following the loss of a major automotive customer. Management identifies impairment indicators under IAS 36.12(b).
Step 1 — Estimate value in use
Management projects net operating cash flows of EUR 410,000 in year one (based on the current order book), EUR 480,000 in year two, EUR 520,000 in years three and four as replacement contracts ramp up, and EUR 390,000 in year five (the machine's final year of economic life, including disposal proceeds of EUR 60,000). The pre-tax discount rate is 10.2%. Discounting produces a value in use of EUR 1,760,000.
Step 2 — Estimate fair value less costs of disposal
Hoffmann obtains a broker opinion for the CNC milling centre. The broker values the machine at EUR 1,420,000 based on two recent transactions for comparable five-axis milling centres in the German secondary market. Disposal costs total EUR 45,000 (EUR 30,000 for specialist rigging and transport, EUR 15,000 in broker commission). Fair value less costs of disposal is EUR 1,375,000.
Step 3 — Determine recoverable amount and impairment loss
Recoverable amount is the higher of value in use (EUR 1,760,000) and fair value less costs of disposal (EUR 1,375,000). Recoverable amount is EUR 1,760,000. The carrying amount of EUR 1,850,000 exceeds this by EUR 90,000. Impairment loss of EUR 90,000 recognised in profit or loss per IAS 36.59.
Conclusion: if the team had tested only fair value less costs of disposal, the impairment loss would have been EUR 475,000 instead of EUR 90,000, overstating the write-down by EUR 385,000 and misrepresenting the asset's economic value to the reporting entity.
Why it matters in practice
The FRC's 2023 thematic review of IAS 36 disclosures found that entities frequently failed to disclose which measure (value in use or fair value less costs of disposal) determined the recoverable amount and what key assumptions underpinned it. IAS 36.130(d)(i) requires disclosure of the basis on which recoverable amount was determined, and IAS 36.134(d) requires disclosure of each key assumption. Auditors who accepted boilerplate disclosures without cross-checking against the actual model missed both requirements.
Teams sometimes estimate only one measure without considering whether the other would have produced a higher recoverable amount. IAS 36.18 requires the entity to determine recoverable amount as the higher of the two measures. IAS 36.19 provides a shortcut (stop at the first measure if it exceeds carrying amount), but where the first measure is below carrying amount, the entity must assess the second before concluding that an impairment exists. Skipping the second measure and recording an impairment is conservative, but IAS 36 does not permit deliberate understatement of asset values.
Related terms
Frequently asked questions
Can I skip value in use and test only fair value less costs of disposal?
Yes, if fair value less costs of disposal already exceeds the carrying amount, IAS 36.19 allows the entity to stop there. The practical problem arises when fair value less costs of disposal falls short. At that point the entity must calculate value in use before recognising an impairment loss. ISA 540.13(a) requires the auditor to evaluate whether the entity's chosen approach is appropriate, which includes checking that the shortcut was validly applied.
When does fair value less costs of disposal exceed value in use?
This happens when the market values the asset more highly than management's projections imply. A common scenario involves an asset whose highest and best use under IFRS 13.28 differs from the entity's current use. A warehouse used for low-margin storage may have a market value driven by residential conversion potential. The entity's value-in-use calculation, locked to the current use, would produce a lower figure.
How do I document the choice between the two measures?
Record which measure was tested first, whether the IAS 36.19 shortcut applied, and the conclusion reached. If both measures were estimated, document the key assumptions for each (discount rate and cash flow projections for value in use; fair value inputs and disposal cost components for fair value less costs of disposal). ISA 230.8 requires the auditor's documentation to show the basis for the conclusions reached, including why the selected recoverable amount is appropriate.