Fair value in accounting means the price for which a non-current asset can be sold in an active market. The fair value should not be confused with the carrying amount of an asset, that is the purchase price of the asset less accumulated depreciation.
Definition of Fair Value less Costs to Sell
Fair value less costs to sell can be defined as the value that can be received to sell the asset in an active market at the measurement date less directly attributable costs of selling the asset. Directly attributable costs include legal costs, dismantling costs, selling costs and other costs that can be tied to selling the asset.
Fair value less costs to sell is also known as fair value less disposal costs and is calculated to decide the recoverable amount of the asset. Recoverable amount is the higher of value in use and fair value less costs to sell.
How to Calculate Fair Value less Costs to Sell?
There are no complicated formulas involved in calculating fair value less costs to sell and can be simply calculated by deducting directly attributable selling costs from the fair value of the asset. That being said, we can calculate fair value less disposal costs by performing the following steps:
- Determine the market price of the asset at the measurement date.
- Identify all the costs associated with selling the asset.
- Deduct the costs from the market price to arrive at the fair value less disposal costs figure.
ILLUSTRATION
An asset can be sold for $2,000 at the measurement date and the following is the list of costs that the company will incur.
- Lawyer’s fees of $50 for documenting the sale
- $50 shipping cost of the asset
- Cost of $2,500 to purchase a new asset
We can easily calculate fair value less costs to sell by performing the above THREE steps.
Market price = $2,000
Directly attributable selling costs = $50 (Lawyer’s fees) + $50 (Shipment) = $100
Fair value less disposal costs = $1,900 (2,000-100)
The cost of purchasing the new asset is excluded because it is avoidable and not directly related to the sale.
Fair Value less Disposal Costs Vs Value in Use
The fair value less costs to sell and value in use are compared to arrive at the recoverable amount of an asset. Value in use is referred to the benefits that can be derived from the continuing use of the asset in the normal course of trading of the company. Basically, the benefits are the cash inflows that the asset will generate, discounted at an appropriate discount rate, throughout its useful life.
The recoverable amount, higher of the value in use and fair value less costs to sell, is then compared with the carrying amount of the asset to see if it needs to be impaired.
