Wednesday, 17 December 2014

Example of Recoverable amount

Example of Recoverable amount

Recoverable amount is greater of fair value of asset less cost of sell the asset and value in use. Fair is the open market value where value in use is discounted value of future cash flows expected to flow to organization from the asset.

Future Cash flows
30,000
Expected period of cash flows
3 years
Discount Rate
10%
Open market price of asset
70,000



Calculate the value in use?

Solution

Step 1 finds the value in use

1. Determine the cash flows
2. Apply the discount rate for discounting
3. Add all discounted values

Year
Cash flows
Discount factor
Present value
1
30,000
1/1.1= .91
27,300
2
30,000
1/1.21=.83
24,900
3
30,000
  1/1.34 = .75
22,500
Value in use


74,700

Step 2 find the fair value of asset


Fair value is the value which can be obtained in arm length transaction i.e. open market value

Step 3 finds the recoverable amount

Compare the fair value less cost of sell and value in use and the greater of them is recoverable amount.

Fair value
Value in use
Recoverable amount
Decision bases
70,000
74,400
 74,400
Whichever is greater


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