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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