Fair Value Less Costs Of DisposalEdit

Fair value less costs of disposal (FVLCD) sits at the core of modern impairment accounting for non-current assets under the IFRS framework. It captures the market-facing value of an asset if it were sold in an orderly transaction, after taking into account the costs that would be incurred to dispose of it. In practice, this measure is positioned against the downward-looking counterpart, value in use, to determine the recoverable amount of an asset or cash-generating unit. When the carrying amount exceeds the recoverable amount, an impairment is recognized so that the asset’s book value does not exceed economically realizable value.

This concept is embedded in the IFRS impairment model, most notably in the standards governing long-lived assets and assets held for use in operations. It is important to distinguish FVLCD from the treatment of inventories under IAS 2; inventories are assessed using net realizable value, a related but distinct idea focused on selling through normal channels. For the measurement of fair value itself, standards such as IFRS 13 provide guidance on how to determine fair value in an orderly transaction, which feeds into the FVLCD calculation. The impairment framework then compares the carrying amount to the higher of FVLCD and Value in use to determine the recoverable amount, which is the benchmark for impairment decisions under IAS 36.

Definition and scope

FVLCD is defined as the amount obtainable from the disposal of an asset in an orderly transaction between market participants, less the costs of disposal. This is the net proceeds available to the entity after selling costs are accounted for.
The recoverable amount is the higher of FVLCD and value in use, a measure derived from the discounted future cash flows expected to be generated by the asset. If the recoverable amount is below the asset’s carrying amount, an impairment loss is recognized to bring the asset’s carrying amount down to the recoverable amount.
FVLCD applies to non-current assets and cash-generating units that are not inventories. For inventories, the IFRS framework relies on net realizable value rather than FVLCD, reflecting the different purpose of inventory valuation in financial reporting.

In practice, preparers must gather market-based evidence of fair value or use robust models for estimating what a market participant would pay. Where active markets exist, fair value tends to be driven by observable prices; where markets are illiquid, measurement may require techniques that incorporate expectations about future market conditions and the discounting of cash flows. For the fair value component, the standard references the notion of price in an orderly transaction and considers inputs from market participants rather than management’s own preferences.

Key concepts linked to FVLCD include Fair value measurement, recoverable amount, and impairment testing, as well as the idea of market participants and the role of disposal costs in realization proceeds. Readers may also wish to consult IFRS for a broad view of how these concepts fit into global financial reporting.

Calculation and estimation

Estimating FVLCD involves a structured approach that blends market evidence with cost considerations:

Determine the fair value (FV) of the asset if sold in an orderly transaction with market participants. This often leverages observable market data and, where necessary, valuation techniques consistent with IFRS 13.
Subtract the incremental costs of disposal to arrive at FVLCD. Disposal costs are those costs that would be incurred specifically to sell the asset in its current condition, including incremental commissions, legal fees, and closing costs.
Compare the resulting FVLCD with the asset’s value in use (ViU), the latter being the present value of expected future cash flows from the asset, discounted at an appropriate rate that reflects the time value of money and the asset-specific risk.
The recoverable amount is the higher of FVLCD and ViU. If the asset’s carrying amount exceeds this recoverable amount, an impairment loss is recognized for the amount of the excess.

Estimation often requires inputs that are uncertain in practice, such as discount rates, cash flow forecasts, and assumptions about disposal conditions. The process is further influenced by the availability of market data and the degree of judgment permitted under the framework. Readers may encounter terms like discount rate and cash flows in the valuation discussions, and may refer to Value in use for the other leg of the recoverable amount comparison.

Impairment testing and governance

Impairment testing under IAS 36 is designed to prevent assets from carrying values that exceed realizable amounts. A few governance considerations shape how FVLCD operates in practice:

Triggers for impairment: A change in market conditions, technology, regulatory environment, or the asset’s physical condition can prompt a test. When indicators of impairment exist, the entity must estimate recoverable amount using the methods described above.
Measurement balance: The framework requires that the recoverable amount be the greater of FVLCD and ViU. This balance is intended to reflect both market-based realism and the asset’s own earning power.
Disclosure and consistency: Entities disclose impairment losses, key assumptions, and sensitivity analyses to provide users with insight into how fragile or robust the measurements are under different conditions. See discussions around impairment and valuation disclosures in IFRS guidance.
Interaction with capital allocation: Because impairment charges can reduce reported earnings and asset values, firms may adjust investment strategies to prioritize portfolio optimization and prudent capital expenditure. The structure is meant to reward capital discipline and discourage asset inflation.

Controversies and debates

From a conservative, market-oriented perspective, FVLCD is valued for its discipline and transparency, but it is not without criticism and debate.

Procyclicality and earnings volatility: Critics argue that fair value-based measurements, including FVLCD, can amplify economic cycles by forcing impairment losses (or, less commonly, gains) in line with market price movements. Proponents counter that markets reflect real value and that recognizing losses during downturns helps prevent capital misallocation and preserves long-term investor trust.
Market data limitations: In markets with limited liquidity or few comparable transactions, fair value estimates may rely on models or unobservable inputs, inviting scrutiny over reliability. Advocates emphasize that robust models with guardrails, conservative assumptions, and disclosures can mitigate these concerns, and that value in use complements market signals where they are weak.
Comparability with other jurisdictions: IFRS-based impairment (which uses FVLCD) differs from that used under some other accounting regimes (e.g., certain US GAAP approaches). This has led to debates about cross-border comparability, consistency in impairment signaling, and the relative strengths of different frameworks.
Role of disposal costs: The inclusion of disposal costs within the fair value framework can be controversial, particularly for assets with high sale costs or in illiquid markets. Critics may argue that treatment should separate market value from sale-related deductions to avoid overstating or understating impairment. Supporters maintain that disposal costs are an inherent part of realizing value and provide a more accurate picture of net proceeds.
Policy critique and economic realism: Some critics contend that impairment accounting, including FVLCD, can misallocate capital if it does not fully reflect long-horizon strategic value or essential uses of assets in certain contexts. Proponents of the approach argue that it anchors asset values in observable market outcomes and cash-generating potential, aligning financial reporting with the realities investors face.

In debates about these issues, proponents of market-based measurement emphasize clarity, accountability, and discipline in reporting. Critics who emphasize stability or long-term planning may push back on frequent impairment charges or on the weight given to market prices that themselves reflect temporary conditions. The ongoing discussion in standard-setting bodies and among practitioners tends to revolve around how to balance timely recognition of value changes with the desire for reliable, decision-useful information.

Global context and alternatives

IFRS vs US GAAP: Under IFRS, impairment testing centers on the recoverable amount formed by the higher of FVLCD and ViU. US GAAP uses its own impairment framework for long-lived assets, with its own methods for measuring recoverability and impairment values. The differences influence how entities report asset health across borders and how investors compare companies globally.
Relation to other valuation concepts: FVLCD interacts with Fair value measurements, net realizable value concepts for inventories, and the broader impairment framework. The idea of market-based pricing versus intrinsic value is central to understanding how assets are valued on financial statements.
Practice in capital markets: Investors often weigh impairment charges as signals about asset quality, capital efficiency, and management judgment. Markets may react to impairment outcomes, especially for large or high-profile assets, which in turn shapes corporate strategy.