Key Points
- Recoverable amount only needs to be determined when indicators of impairment exist, unless the asset is goodwill or an intangible with an indefinite useful life.
- The test compares carrying amount to recoverable amount; any excess is recognised as an impairment loss immediately in profit or loss.
- IAS 36.33 permits value in use to be used alone if it already exceeds carrying amount, avoiding the cost of obtaining a fair value less costs of disposal estimate.
- Errors in selecting the discount rate for value in use are the single most common cause of misstated recoverable amounts on non-Big 4 engagements.
What is Recoverable Amount?
IAS 36.18 requires an entity to test an asset for impairment whenever indicators suggest that its carrying amount may not be recoverable. For goodwill and indefinite-life intangible assets, IAS 36.10 mandates the test annually regardless of indicators. The recoverable amount is determined at the individual asset level unless the asset does not generate cash inflows largely independent of other assets, in which case the entity identifies the cash-generating unit to which it belongs and tests at that level (IAS 36.22).
The standard gives the entity a practical shortcut. If either fair value less costs of disposal or value in use exceeds the carrying amount, the asset is not impaired and the entity does not need to estimate the other measure (IAS 36.19). In practice, most non-financial entities default to value in use because it relies on management's own cash flow projections rather than an external valuation. That default, however, shifts the audit risk squarely onto the discount rate, growth assumptions, and terminal value calculation.
Worked example: Bergström Skog AB
Client: Swedish forestry and paper company, FY2025, revenue EUR 75M, IFRS reporter. Bergström operates a paper mill in Sundsvall that has experienced declining margins because of reduced demand for uncoated printing paper. The mill's carrying amount (including allocated goodwill of EUR 1,200,000 from a 2019 acquisition) is EUR 8,400,000 at 31 December 2025.
Step 1 — Identify the cash-generating unit
The Sundsvall mill is the smallest group of assets generating cash inflows largely independent of other assets. Bergström's two other mills produce different paper grades sold to different customer bases. The CGU is the Sundsvall mill, including allocated goodwill.
Step 2 — Estimate value in use
Management projects net cash flows over five years based on current order book and contracted prices, declining at 3% annually to reflect the structural market shift. Terminal value assumes zero real growth. The pre-tax discount rate is 9.8%, derived from the weighted average cost of capital adjusted for asset-specific risks. The present value of projected cash flows is EUR 7,150,000.
Step 3 — Assess fair value less costs of disposal
Bergström obtains a broker opinion valuing the mill at EUR 6,800,000, with estimated disposal costs of EUR 340,000. Fair value less costs of disposal is EUR 6,460,000.
Step 4 — Determine recoverable amount and impairment loss
Recoverable amount is the higher of value in use (EUR 7,150,000) and fair value less costs of disposal (EUR 6,460,000). Recoverable amount is EUR 7,150,000. The carrying amount of EUR 8,400,000 exceeds this by EUR 1,250,000. Under IAS 36.104, the impairment loss is allocated first to goodwill (EUR 1,200,000), reducing goodwill to nil. The remaining EUR 50,000 reduces the carrying amounts of the mill's other assets on a pro-rata basis.
Conclusion: the recoverable amount of EUR 7,150,000 produces a total impairment loss of EUR 1,250,000, and the measurement is defensible because the value-in-use calculation is anchored to board-approved budgets, the discount rate is built from observable market inputs, and a broker opinion cross-checks the fair value alternative.
Why it matters in practice
- The FRC's 2023 thematic review of IAS 36 disclosures found that entities frequently failed to disclose the key assumptions underpinning recoverable amount calculations, particularly the discount rate and growth rate used in value-in-use models. IAS 36.134(d) requires disclosure of each key assumption.
- Teams often test recoverable amount using a post-tax discount rate applied to post-tax cash flows, then present the result as if it were a pre-tax calculation. IAS 36.55 requires value in use to be determined using a pre-tax discount rate applied to pre-tax cash flows.
Recoverable amount vs. carrying amount
| Dimension | Recoverable amount (IAS 36) | Carrying amount |
|---|---|---|
| Definition | Higher of fair value less costs of disposal and value in use | Amount at which the asset is recognised on the balance sheet after depreciation and any previous impairment losses |
| Purpose | Ceiling for impairment testing | Basis against which the ceiling is compared |
| Measurement frequency | When impairment indicators exist (annually for goodwill and indefinite-life intangibles) | Updated continuously through depreciation, amortisation, and revaluation |
| Key judgment | Discount rate selection, cash flow projections, terminal value assumptions | Depreciation method, useful life, residual value |
| Effect of error | Overstated recoverable amount hides an impairment loss, inflating assets and profit | Overstated carrying amount triggers the same balance sheet overstatement but through incorrect depreciation rather than a missed impairment |
The distinction matters on engagements because the carrying amount is largely mechanical (based on acquisition cost and depreciation policy) while recoverable amount requires forward-looking judgment. Auditors who focus their testing only on whether impairment indicators exist, without then scrutinising the recoverable amount model, miss the point where management bias most affects the financial statements.
Related terms
Frequently asked questions
Do I need to calculate both value in use and fair value less costs of disposal?
Not always. IAS 36.19 permits the entity to stop at whichever measure it determines first, provided that measure already exceeds the carrying amount. If value in use is EUR 7,150,000 and the carrying amount is EUR 6,000,000, no fair value estimate is required. Most practitioners estimate value in use first because the inputs (management cash flow forecasts) are already available on the engagement file.
When does recoverable amount need to be tested for goodwill?
IAS 36.10(b) requires an annual impairment test for goodwill, regardless of whether impairment indicators exist. The test is performed at the level of the cash-generating unit (or group of CGUs) to which the goodwill is allocated. Timing is flexible within the reporting period, but IAS 36.96 requires the test to be performed at the same time each year.
How do I audit the discount rate in a recoverable amount calculation?
Obtain management's discount rate build-up and test each component independently: the risk-free rate against government bond yields, the equity risk premium against published market data, and any asset-specific adjustments against the engagement's risk assessment. ISA 540.18 requires the auditor to evaluate whether the assumptions are reasonable. Compare the resulting rate to rates used by listed peers in the same sector and jurisdiction as a cross-check.