Carry phase

Recoverable amount and value in use for a model asset

Carry, live question

Recoverable amount is the higher of an asset's fair value less costs of disposal and its value in use IAS 36 §18. Value in use is the present value of the future cash flows the asset is expected to generate IAS 36 §30. An impairment loss is the amount by which carrying amount exceeds recoverable amount, and it is the figure the ImpairmentPin writes into the ladder.

The two measures

IAS 36 measures recoverable amount as the higher of two figures. Fair value less costs of disposal is what a market participant would pay for the asset, net of disposal cost; for a bespoke internal model this is often hard to observe. Value in use is the present value of the cash flows the entity itself expects from continuing to use the asset. Because a token-built model rarely has an observable market, value in use is usually the operative measure IAS 36 §18.

Cash-flow inputs for a model asset

The incremental cash flows the asset generates or the operating cost it saves, over its remaining useful life.
Run-phase inference cost, which is a cash outflow that reduces net value in use.
A remaining horizon consistent with the reassessed useful life after any obsolescence event.
Exclusion of cash flows from future enhancements not yet committed, which IAS 36 does not allow into the base case.

The discount rate

Value in use discounts the forecast cash flows at a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset IAS 36 §30. For a fast-obsoleting model the asset-specific risk is high, which pushes the rate up and the value down, reinforcing why these assets impair readily.

Measuring the loss

If recoverable amount is below carrying amount, the asset is written down to recoverable amount and the difference is recognised as an impairment loss in profit or loss. That written-down figure becomes the new carrying amount from which amortisation continues over the remaining life, and it is the number the builder applies when an ImpairmentPin is dropped IAS 36 §18.