Recovery amount

When a bond or other financial derivative defaults, the recovery amount is theamount that the
underlying company can afford to pay. This is usually a result of a liquidation of the company's
assets and generally result
RECOVERABLE AMOUNT is, in relation to an asset, the net amount that is expected to be recovered
through the cash inflows and outflows arising from its continued use and subsequent disposal. s in
a lower amount than the par value. Categories: Finance.

the value of an asset, either the price it would fetch if sold, or its value to the company when
used, whichever is the larger figure
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The recoverable amount of an asset or a CGU is the higher of its fair value less costs
to sell and its value in use.

How To Calculate The Recoverable Amount Of an Asset?

Recoverable amount is the higher of an asset's fair value less costs to sell (sometimes called net selling
price) and its value in use where:

Determining Recoverable Amount

- If fair value less costs to sell or value in use is more than carrying amount, it is not necessary to
calculate the other amount. The asset is not impaired. [IAS 36.19]
- If fair value less costs to sell cannot be determined, then recoverable amount is value in use. [IAS
36.20]
- For assets to be disposed of, recoverable amount is fair value less costs to sell. [IAS 36.21]
- other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the
entity expects to derive from the asset

Cash flow projections should be based on reasonable and supportable assumptions, the most recent
budgets and forecasts, and extrapolation for periods beyond budgeted projections. [IAS 36.33] IAS 36
presumes that budgets and forecasts should not go beyond five years; for periods after five years,
extrapolate from the earlier budgets. [IAS 36.35] Management should assess the reasonableness of its
assumptions by examining the causes of differences between past cash flow projections and actual cash
flows. [IAS 36.34]
Cash flow projections should relate to the asset in its current condition future restructurings to which the
entity is not committed and expenditures to improve or enhance the asset's performance should not be
anticipated. [IAS 36.44]

RECOVERABLE AMOUNT
The financial accounting term recoverable amount refers to the larger of the market value of an asset
or the value provided to the company as currently used. The concept of recoverable amounts is
oftentimes used in the context of determining the impairment of fixed assets.

Calculation
The recoverable amount of an asset is the greater of the two calculations shown below:
Recoverable Amount = Fair Value - Cost of Disposal
Recoverable Amount = Value in Use
Where:

Fair Value: the price that would be received when selling an asset.

Cost of Disposal: incremental expenses directly attributed to the removal of an asset.

Explanation
Accounting principles require companies to record on their balance sheet instances where the
carrying amount of an asset exceeds the recoverable amount. For example, if the company has
reason to believe an asset's value may be impaired, it's required to perform a formal estimate of the
recoverable amount. This approach is similar to the concept of lower of cost or market value, which
applies to inventory. IAS 36 provides accountants with guidance on this topic, stating:

If the asset's fair value less the cost of disposal cannot be determined, the recoverable
amount is equal to its value in use.

If the company intends to sell the asset, the recoverable amount is equal to its fair value less
the cost of disposal.

Note: If the fair value of an asset less its cost of disposal, or the asset's value in use is greater than
its carrying amount, then calculating a recoverable amount is not necessary since the asset is not
impaired

Example
Last year, Company A purchased a small fleet of natural gas delivery trucks for $700,000. Soon
after purchasing the trucks, a local refinery began injecting waste gas into the local natural gas
pipeline. Company A was informed by utility officials the quality of natural gas in the pipeline did not
meet the manufacturer's quality guidelines for their compressed natural gas vehicles.
Company A will be forced to sell the trucks after only one year. Company A had been using a ten
year, straight line depreciation method for these vehicles. The net book value before discovering this
impairment in value was $700,000 - $70,000, or $630,000. The vehicle's manufacturer found a
buyer that was willing to pay $400,000 for Company A's trucks. Company A was also required to pay
$30,000 to have the trucks transported to this new owner.
Based on information obtained from the manufacturer, the recoverable amount for these trucks was
calculated as:
= Fair Value - Cost of Disposal
= $400,000 - $30,000, or $370,000
Since the net book value of these assets was $630,000, Company A recorded an impairment in
value of $630,000 - $370,000, or $260,000. The journal entry to record this transaction is as follows:
Debit
Impairment Loss

$260,000

Accumulated Impairment Losses

www.money-zine.com/definitions/investing-dictionary/recoverable-amounts/
1.
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Credit
$260,000