Fair value less costs of disposal (main IFRS term fair value less costs to sell) – Costs of disposal, other than those that have been recognised as liabilities, are deducted in measuring fair value less costs of disposal. Examples of costs of disposal are legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs to bring an asset into condition for its sale. However, termination benefits (as defined in IAS 19) and costs associated with reducing or reorganising a business following the disposal of an asset are not direct incremental costs to dispose of the asset.
Sometimes, the disposal of an asset would require the buyer to assume a liability and only a single fair value less costs of disposal is available for both the asset and the liability.
It may be necessary to consider some recognised liabilities to determine the recoverable amount of a cash-generating unit. This may occur if the disposal of a cash-generating unit would require the buyer to assume the liability. In this case, the fair value less costs of disposal (or the estimated cash flow from ultimate disposal) of the cash-generating unit is the price to sell the assets of the cash-generating unit and the liability together, less the costs of disposal. To perform a meaningful comparison between the carrying amount of the cash-generating unit and its recoverable amount, the carrying amount of the liability is deducted in determining both the cash-generating unit’s value in use and its carrying amount.
For example: Fair value less costs of disposal
A company operates a mine in a country where legislation requires that the owner must restore the site on completion of its mining operations. The cost of restoration includes the replacement of the overburden, which must be removed before mining operations commence. A provision for the costs to replace the overburden was recognised as soon as the overburden was removed. The amount provided was recognised as part of the cost of the mine and is being depreciated over the mine’s useful life. The carrying amount of the provision for restoration costs is CU500, which is equal to the present value of the restoration costs.
The entity is testing the mine for impairment. The cash-generating unit for the mine is the mine as a whole. The entity has received various offers to buy the mine at a price of around CU800. This price reflects the fact that the buyer will assume the obligation to restore the overburden. Disposal costs for the mine are negligible. The value in use of the mine is approximately CU1,200, excluding restoration costs. The carrying amount of the mine is CU1,000.
The cash-generating unit’s fair value less costs of disposal is CU800. This amount considers restoration costs that have already been provided for. As a consequence, the value in use for the cash-generating unit is determined after consideration of the restoration costs and is estimated to be CU700 (CU1,200 less CU500). The carrying amount of the cash-generating unit is CU500, which is the carrying amount of the mine (CU1,000) less the carrying amount of the provision for restoration costs (CU500). Therefore, the recoverable amount of the cash-generating unit exceeds its carrying amount.
Fair value less costs to sell (FVLCS) is the amount obtainable from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties, less the costs of disposal. This term is consistent with the measurement basis in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Fair value less costs of disposal
IAS 36 establishes a hierarchy for determining an asset’s fair value less costs to sell as follows:
- The best evidence of the asset’s fair value less costs to sell is a price in a binding sale agreement in an arm’s length transaction, adjusted for incremental costs that would be directly attributable to the disposal of the asset.
- If there is no binding sale agreement, but the asset is traded in an active market, fair value less costs to sell is the asset’s market price less the costs of disposal.
- If there is no binding sale agreement or active market for the asset, fair value less costs to sell is based on the best information available to reflect the amount that the entity could obtain at the end of the reporting period from the disposal of the asset in an arm’s length transaction after deducting the costs of disposal.
If a market price is not available, fair value less costs to sell can be determined using a discounted cash flow (DCF) approach. The following valuation principles will apply when determining fair value less costs to sell:
- The calculation of fair value less costs to sell should reflect all future events that would affect the expected cash flows for a typical market participant that holds the asset.
- Fair value should reflect information that is available without undue cost or effort about the market’s assessment of the future cash flows.
- Market-based assumptions should be based on current market data, unless reliable evidence indicates current experience will not continue.
- If there is contrary data indicating that market participants would not use the same assumptions as the entity, the entity should adjust its assumptions to incorporate the market information.
- Fair value less costs to sell also includes the amount of transaction costs that would be incurred at the reporting date in disposing of the asset.
Fair value less costs of disposal
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