In impairment testing for long-lived assets held for use, which statement about recoverable amount is correct?

• A. Compare carrying amount to fair value less costs of disposal
• B. Compare carrying amount to market value
• C. Compare carrying amount to value in use only
• D. Compare carrying amount to recoverable amount, defined as the higher of fair value less costs of disposal and value in use

Answer: (D)

In impairment tests for long-lived assets held for use, you determine recoverable amount as the amount you could recover from the asset, which is the higher of two measures: value in use and fair value less costs of disposal. Compare the asset’s carrying amount to that recoverable amount. If the carrying amount is higher, an impairment loss is recognized for the amount of the excess.

Value in use is the present value of the future cash flows expected from the asset, based on the best available estimates. Fair value less costs of disposal is the amount obtainable from selling the asset in an orderly transaction, minus costs to dispose. Taking the higher of these two ensures you don’t miss impairment when the asset’s value to continued use or its sale value is lower than its carrying amount.

So the correct approach is to compare carrying amount with the recoverable amount defined as the greater of value in use and fair value less costs of disposal. If VIU is higher than FVLCD, recoverable amount reflects VIU; if FVLCD is higher, it reflects the sale value. The other approaches omit one or both components and could miss an impairment. For example, if VIU is 80 and FVLCD is 90, recoverable amount is 90; if the carrying amount is 95, impairment of 5 would be recognized.