## AS 28 — Computing Recoverable Amount

### Recoverable Amount = Higher of (VIU, NSP)

You must compute both components and pick the higher one.

---

## Component 1: Value in Use (VIU)

Definition: Present value of future cash flows expected from using the asset and disposing of it at end of useful life.

### What to Include in Cash Flows

Include	Exclude
Cash inflows from using the asset	Financing inflows/outflows
Cash outflows to generate those inflows	Income tax payments
Residual/scrap value in the final year	Restructuring costs not yet committed

```

Cash flows each year = Inflows from asset use

− Operating outflows to generate inflows

Final year cash flows = Operating cash flows + Residual/Scrap value

```

### Discount Rate

Always use a pre-tax discount rate
It should reflect the time value of money and risks specific to the asset

Given	Derive
Post-tax rate = 7%	Pre-tax rate ≈ 10%

---

## Component 2: Net Selling Price (NSP)

```

Selling Price (at arm's length) XXX

Less: Cost of Disposal (XX)

(brokerage, legal fees,

removal costs, etc.)

─────────────────────────────────────

Net Selling Price XXX

```

---

## Choosing Recoverable Amount

```

RA = Higher of (VIU, NSP)

Impairment Loss = CA − RA (only if CA > RA)

```

> Tip: You only need the higher of the two. If one is clearly higher without full computation, you may stop after confirming it exceeds CA.

Worked example

### Example 1

Illustration — PPE with 8-Year Life (₹40,000 Lakhs)

Step 1 — Compute Carrying Amount on 31.12.2011

	₹ Lakhs
Cost on 01.01.2009	40,000
Less: Depreciation for 3 years [(40,000−1,000)/8 × 3]	(14,625)
CA on 31.12.2011	25,375

Step 2 — Compute Value in Use (Discount rate: 15%, Remaining life: 5 years)

Year	Cash Flow (₹ L)	PV Factor (15%)	PV (₹ L)
2012	4,000	0.870	3,480
2013	6,000	0.756	4,536
2014	6,000	0.658	3,948
2015	8,000	0.572	4,576
2016	4,000 + 1,000 scrap	0.497	2,485
VIU			19,025

Step 3 — Net Selling Price = ₹20,000 Lakhs (given)

Step 4 — Recoverable Amount

RA = Higher of (19,025 and 20,000) = ₹20,000 Lakhs

Step 5 — Impairment Test

	₹ Lakhs
CA	25,375
RA	20,000
Impairment Loss	5,375

⚠️ Common exam mistakes

Using post-tax discount rate instead of pre-tax — AS 28 explicitly requires a pre-tax rate for VIU calculation.
Omitting the residual/scrap value from the final year's cash flows — it must be added to the last year's operating cash flow before discounting.
Computing NSP as the gross selling price without deducting costs of disposal such as brokerage, legal fees, and removal costs.
Computing RA as the LOWER of VIU and NSP — it is always the HIGHER of the two.
Discounting cash flows at a post-tax weighted average cost of capital (WACC) — WACC is not the correct rate; use a pre-tax asset-specific rate.

Bare-Act text Paragraphs 4 and 49 (Definitions and Discount Rate) · AS 28 — Impairment of Assets (ICAI) · click to expand

Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Net selling price is the amount obtainable from the sale of an asset in an arm's length transaction between knowledgeable, willing parties, less the costs of disposal. The discount rate should be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset.

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AS 28 – Recoverable Amount: Value in Use and Net Selling Price

Worked example

⚠️ Common exam mistakes