IAS 36 requires an impairment test whenever there are indicators that an asset's carrying amount may not be recoverable (and annually for goodwill and indefinite-life intangibles). The recoverable amount is the higher of Value in Use and Fair Value Less Costs of Disposal. An asset is impaired when its carrying amount exceeds this recoverable amount. Understanding when each measure is higher — and how to calculate each — is essential for preparers and auditors of intangible-rich businesses.
Accounting Framework
Value in Use vs Fair Value Less Costs of Disposal
Value in Use vs Fair Value Less Costs of Disposal for impairment testing under IAS 36. When each measure produces the higher recoverable amount and how to apply them.
| Criteria | Value in Use (VIU) | Fair Value Less Costs of Disposal (FVLCD) |
|---|---|---|
| Definition | Present value of future cash flows expected from continued use and eventual disposal | Price receivable in an orderly sale between market participants, less disposal costs |
| Perspective | Entity-specific — reflects the entity's own expectations and synergies | Market-based — reflects what a market participant would pay |
| Cash flow basis | Management's approved forecasts (max 5 years, then terminal value) | Cash flows a market participant would expect |
| Discount rate | Pre-tax rate reflecting time value and asset-specific risks | Market-based rate consistent with fair value measurement |
| Synergies included? | Yes — entity-specific synergies from current use | Only synergies available to market participants generally |
| Restructuring costs | Excluded unless already committed (IAS 36.44) | Included if a market participant would factor them in |
When to Use Each Approach
Value in Use (VIU)
- Entity has significant entity-specific synergies that increase value beyond market price
- No observable market data for fair value (Level 3 inputs would be unreliable)
- Intangible assets or CGUs where the entity's use generates more value than a sale
- Management has robust approved forecasts supporting continued use
Fair Value Less Costs of Disposal (FVLCD)
- Observable market data or recent comparable transactions available
- Asset or CGU could be sold at a premium above its use value
- Entity is considering disposal or restructuring of the asset/CGU
- Market-based evidence provides a more reliable measure than management forecasts
Our Verdict
Calculate both when practical — the standard requires the higher of the two. Value in Use is often preferred for internally-used intangible assets where entity-specific synergies are significant. Fair Value Less Costs of Disposal is more relevant when market evidence is available or disposal is being considered. Only one needs to exceed carrying amount to avoid impairment.
Related Glossary Terms
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