Recoverable Amount vs FVLCD
Recoverable amount vs FVLCD under IAS 36 — what each measure is, when value in use exceeds FVLCD, and how CFOs structure the impairment file.
Introduction
Under IAS 36 (UK and global IFRS), the recoverable amount of an asset or cash-generating unit (CGU) is the higher of two distinct measurements: fair value less costs of disposal (FVLCD) and value in use (VIU). The two measures answer different questions, and the rule is straightforward — calculate both where possible, take the higher, and recognise an impairment loss if that higher figure is below the carrying amount.
In practice, CFOs and impairment teams often calculate only one of the two — usually value in use — and rely on the higher-of principle as a fallback if challenged. This shortcut is acceptable under IAS 36 paragraph 19, which permits using a single measure if there is reason to believe it materially exceeds the other. The shortcut becomes a problem when the assumption turns out to be wrong.
The distinction between recoverable amount and FVLCD is therefore not really a comparison of alternatives — recoverable amount is the higher of FVLCD and VIU. The substantive comparison is between FVLCD and VIU, with recoverable amount as the framing concept.
TL;DR: Recoverable amount under IAS 36 is the higher of FVLCD and value in use. FVLCD is the market-participant exit price less direct costs to dispose. VIU is the entity-specific present value of expected future cash flows from the asset in its current use. They diverge when entity-specific cash flows exceed market-participant cash flows (typical for assets where the entity holds operational synergies the market does not price). The recoverable amount is the framing concept; FVLCD and VIU are the two measurement bases.
Recoverable Amount
Recoverable amount is the test value under IAS 36 paragraph 6: the amount above which an asset cannot be carried on the balance sheet. If the carrying amount exceeds the recoverable amount, an impairment loss is recognised to write the asset down to the recoverable amount.
The definition is symmetric and exact: recoverable amount equals the higher of FVLCD and value in use. The standard requires both calculations where possible, but permits a single calculation where the entity has reason to believe it will be the higher of the two — IAS 36 paragraph 19.
How recoverable amount gets calculated
- Identify the asset or CGU being tested
- Determine the carrying amount, including allocated goodwill
- Calculate FVLCD — using observable market evidence where possible (Level 1 / Level 2 of the IFRS 13 hierarchy), or by valuation technique (Level 3)
- Calculate VIU — using a 5-year explicit cash-flow projection plus terminal value, discounted at a CGU-specific pre-tax discount rate
- Take the higher of the two — this is the recoverable amount
- Compare to carrying amount
- Any shortfall is the impairment loss
When you can use a single measure
IAS 36 paragraph 19 permits using one measure where there is reason to believe it materially exceeds the other. The two most common scenarios:
- VIU only: the asset is held for use, has entity-specific synergies, and any plausible disposal proceeds would be below the value generated through continued operation
- FVLCD only: the asset is held for sale, an active market price is observable, and the cost of building a value-in-use model would be disproportionate to the conclusion
In practice, audit-management points routinely arise where the entity relied on the "VIU sufficient" assumption and the auditor disagreed. A defensible file calculates both where the headroom is thin.
What auditors look for in recoverable-amount work
- A clear definition of the asset or CGU being tested
- A documented rationale for the choice of single measure (if applicable)
- A pre-tax discount rate derivation for VIU
- A market-evidence file for FVLCD (multiples, transactions, observable inputs)
- A sensitivity analysis showing the impact of reasonably possible alternative assumptions
- A reconciliation back to the impairment loss recognised (if any)
A UK manufacturer's CGU has a carrying amount of £24m, including £6m of allocated goodwill. The impairment team calculates VIU at £25m using a 5-year DCF plus terminal value, discount rate 11.3%. The team also calculates FVLCD at £22m using EV/EBITDA multiples from recent transactions less estimated disposal costs. Recoverable amount = max(£22m, £25m) = £25m. No impairment loss is required. The sensitivity file shows that VIU would need to fall below £22m before FVLCD became the binding measure, providing 12% headroom on the test.
Fair Value Less Costs of Disposal (FVLCD)
FVLCD is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date, less the direct costs of disposal. The fair-value component defers to IFRS 13; the costs-of-disposal component is the direct, incremental costs that would not have been incurred if the asset were not disposed of.
FVLCD answers a market-participant question: what would a typical buyer pay for this asset, and what would it cost the seller to complete the transaction? The measure is independent of the entity's own intentions or operational position.
What goes into FVLCD
- Fair value of the asset or CGU, measured under IFRS 13 (UK and global)
- Less direct costs of disposal — legal, transaction, transfer taxes, regulatory fees, costs of removal where relevant
- Not less indirect or general administrative costs
How FVLCD gets calculated
Three approaches under IFRS 13 paragraph 62:
- Market approach — observable transactions in identical or similar assets (Level 1 / Level 2)
- Income approach — discounted future cash flows based on market-participant assumptions (Level 3)
- Cost approach — replacement cost adjusted for obsolescence (Level 3)
For most CGU-level FVLCD work, the market approach (EV/EBITDA or EV/revenue multiples from transaction comparables) or income approach (DCF using market-participant cash flows, not entity-specific) provides the measurement. Costs of disposal are typically estimated at 1-3% of the asset's gross fair value.
Where FVLCD wins over VIU
FVLCD exceeds VIU where the market values the asset more highly than the entity's planned use. The typical patterns:
- The entity holds the asset for a specific operational purpose at lower value than its highest and best use
- A potential acquirer with strategic synergies would pay more than the entity can generate from current use
- The asset has appreciation potential the entity does not plan to harvest
A UK group's manufacturing CGU includes a brand asset with broad consumer appeal. The entity uses the brand within its current product range, generating modest excess earnings. A market-participant FVLCD valuation, recognising the brand could be licensed across adjacent categories the entity does not operate in, comes out at £18m. The entity's VIU, reflecting only current-use cash flows, is £14m. Recoverable amount: £18m. The FVLCD calculation prevents an unnecessary impairment that would have been triggered if only VIU had been measured.
Value in Use (VIU)
VIU is the present value of the future cash flows expected to be derived from an asset or CGU in its current use. The cash flows are entity-specific — they reflect the entity's own assumptions about how it will use the asset, not the market's. The discount rate is pre-tax and CGU-specific.
VIU is the entity-perspective measure. It answers: what is this asset worth to us, given how we plan to use it?
What goes into VIU
- 5-year explicit cash-flow projection based on the most recent board-approved budget
- Terminal value computed using a steady-state growth rate (capped at long-term GDP growth in the relevant currency)
- Pre-tax discount rate reflecting the time value of money and the asset-specific risks not already in the cash flows
- Entity-specific assumptions — synergies, cross-selling, planned investment
How VIU gets calculated
- Build a 5-year cash-flow projection from the board-approved budget
- Extend to terminal value using a perpetuity formula with steady-state growth
- Derive a pre-tax discount rate — typically by un-taxing a post-tax WACC
- Discount the cash flows and terminal value to present value
- Compare to carrying amount
Where VIU wins over FVLCD
VIU exceeds FVLCD where the entity has operational synergies, planned investment, or strategic positioning that the market does not price into a hypothetical transaction. The typical patterns:
- Integrated CGUs where cash flows are intertwined with the rest of the group
- Assets with planned but not yet executed value-creation investment
- Assets with regulatory or contractual restrictions that the entity has accepted but a market participant would not
A UK technology group's software CGU is integrated into the group's wider product portfolio, sharing customer accounts and engineering teams. VIU, capturing the group-wide cash flows attributable to the CGU, is £42m. FVLCD, based on stand-alone EV/EBITDA multiples without the integration synergies, is £31m. Recoverable amount: £42m. VIU is the binding measure because the integration synergies are entity-specific and would not be captured by a market-participant FVLCD valuation.
Side-by-Side Comparison
The table below contrasts FVLCD and VIU as the two measurement bases that combine to produce the recoverable amount.
| Criterion | FVLCD | Value in Use (VIU) |
|---|---|---|
| Perspective | Market participant | Entity-specific |
| Cash flow basis | Market-participant assumptions about the asset's use | Entity's own planned use, including synergies |
| Discount rate | Market-participant rate (defers to IFRS 13) | Pre-tax, CGU-specific |
| Standard reference | IAS 36 paragraphs 25-29; IFRS 13 (fair value measurement) | IAS 36 paragraphs 30-57 |
| Inputs | Observable market evidence preferred; transaction comparables; multiples | Board-approved cash-flow forecast; terminal value; pre-tax discount rate |
| Discounting | Implicit (in fair value) | Explicit (DCF) |
| Costs of disposal | Subtracted (legal, transaction, transfer taxes) | Not applicable |
| Synergies | Only those a market participant would price | All entity-specific synergies included |
| Restructuring | Excluded — only market-participant scenarios | Excluded — only restructurings already committed |
| Future capex | Market-participant baseline | Excluded for value-enhancement; included for maintenance |
| Best for | Assets held for sale; assets with active market evidence | Assets held for use; integrated CGUs |
| Audit focus | Market evidence quality, multiple selection, comparable transactions | Cash-flow assumptions, discount rate derivation, sensitivity |
| Typical pattern | Lower when entity holds operational synergies above market value | Lower when market values the asset higher than entity's planned use |
| Disclosure trigger | Required when material to the impairment conclusion | Required under IAS 36 paragraph 134 when VIU is the binding measure |
| Practical complexity | Moderate — requires comparable evidence | High — requires full DCF model and discount-rate derivation |
Recoverable amount is the framing concept; FVLCD and VIU are the two measurement bases. FVLCD answers "what would the market pay?" VIU answers "what is it worth to us?" The recoverable amount is whichever is higher. Where headroom is thin, calculating both is the defensible position; relying on a single measure is acceptable only where the evidence clearly supports it.
Why the Distinction Matters
Three areas drive the practical importance.
Impairment outcome. The choice of single measure versus both can move the recoverable amount by 10-30% in many CGU-level impairment tests. A CGU that fails impairment under VIU only may pass under FVLCD, or vice versa. The audit conversation often turns on whether the "single measure was sufficient" assumption holds.
Audit defensibility. The disclosure requirements under IAS 36 paragraph 134 demand explicit identification of which measure was used and why. A file that does not document the choice — or that documents only the VIU calculation without explaining why FVLCD was not also calculated — fails the disclosure rigour required for material CGUs.
Strategic communication. The choice of measure also signals operational position. A CGU where VIU substantially exceeds FVLCD is one the entity perceives as operationally synergistic; a CGU where FVLCD substantially exceeds VIU is one where the market sees more upside than the entity does. Both patterns are legitimate, but the gap is interpretable by sophisticated readers of the accounts.
A UK retail group's flagship CGU faced thin headroom in 2024. The 2025 impairment file calculated only VIU and concluded no impairment was required, with headroom of 4%. The audit raised the question: had FVLCD been calculated? It had not. When the team subsequently calculated FVLCD using recent retail-sector transaction multiples, the result was 6% below the VIU figure — confirming that VIU was the binding (higher) measure. The conclusion was unchanged but the disclosure was strengthened, and the audit-management point was avoided in 2026 when headroom would have been even thinner.
FAQ
What is the difference between recoverable amount and FVLCD?
Recoverable amount is the higher of FVLCD and value in use under IAS 36 paragraph 6. FVLCD is one of the two measurement bases — the market-participant exit price less direct costs of disposal. Recoverable amount is the framing concept; FVLCD is one specific measure within it.
Can I use FVLCD only or VIU only?
Yes — IAS 36 paragraph 19 permits using a single measure where there is reason to believe it materially exceeds the other. In practice, VIU only is common for assets held for use; FVLCD only is common for assets held for sale or with active market evidence. Where headroom is thin, calculating both is the defensible position.
What costs are included in costs of disposal?
Direct, incremental costs that would not have been incurred if the asset were not disposed of — legal fees, transaction costs, transfer taxes, regulatory fees, and costs of removal where relevant. General administrative costs and income taxes are not included.
Why use a pre-tax discount rate for VIU?
IAS 36 paragraph 55 specifies a pre-tax rate for VIU. The reason is that the cash flows used in VIU are pre-tax cash flows — including a tax charge would double-count. In practice, many teams derive a post-tax WACC and gross it up to a pre-tax rate using the marginal effective tax rate.
How is FVLCD different from fair value under IFRS 13?
FVLCD is the fair value of the asset less the direct costs of disposal. The fair value component defers entirely to IFRS 13's definition (market-participant exit price). The "less costs of disposal" component is an IAS 36 addition that the standalone IFRS 13 fair-value measure does not include.
When does VIU exceed FVLCD?
VIU exceeds FVLCD when the entity's planned use produces more value than the market would price. The typical drivers: operational synergies with other CGUs in the group, planned but not yet executed investment, regulatory positioning, customer-base advantages, or technology integration that a market participant would not replicate.
When does FVLCD exceed VIU?
FVLCD exceeds VIU when the market sees more value than the entity's current use realises — strategic acquirers with synergies the entity does not plan to capture, optionality the entity does not plan to harvest, or under-utilised assets where another operator would deploy them more intensively.
Are the disclosure requirements the same for both measures?
No. IAS 36 paragraph 134 requires disclosure of the basis used for the recoverable amount calculation. When VIU is the basis, the disclosure includes the discount rate, growth rate assumptions, and sensitivity to reasonably possible alternative assumptions. When FVLCD is the basis, the disclosure includes the valuation technique, key assumptions, and Level 3 disclosures under IFRS 13.
When to Seek Expert Support
The recoverable-amount calculation is the single highest-stakes piece of impairment work in many UK and global groups. Edge cases — CGUs with thin headroom, asset disposals mid-year, recent acquisitions still within the goodwill allocation window, and cross-border CGUs with discount-rate complexity — typically warrant specialist input.
Opagio's Asset Valuator module (within Opagio Intangibles) supports both measurement bases. FVLCD is built from comparable-transaction evidence and IFRS 13-compliant fair-value methodology. VIU is built from board-approved cash flows, pre-tax discount-rate derivation, and terminal-value modelling. Both outputs sit in a single audit-trail file, with the higher of the two automatically identified as the recoverable amount.
For CGUs with thin headroom or material allocated goodwill, the sensitivity output shows the range over which the choice of measure could change the conclusion — providing the disclosure quality required for IAS 36 paragraph 134 and reducing the audit-management exposure in subsequent periods.
Book a demo: See how Asset Valuator calculates both FVLCD and VIU in parallel, with the recoverable amount and sensitivity disclosures structured for IAS 36 disclosure. Book a demo or speak to our team.
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