What determines the recoverable amount of an asset?

The recoverable amount of an asset is crucial in determining whether an asset is impaired and, if so, how much impairment loss should be recognized. This amount is defined as the higher of fair value less costs of disposal and value in use.

Fair value is the price that would be received to sell an asset in an orderly transaction between market participants, while value in use represents the present value of the expected future cash flows from the asset. In assessing recoverable amount, it's important to consider both potential sale value (fair value less costs) and the value derived from continued use of the asset (value in use). By taking the higher of the two, the approach ensures that an entity does not underestimate the value of the asset, thus providing a true reflection of its economic potential.

This methodology aligns with the requirements of the relevant accounting standards, which emphasize the need to assess the recoverable amount based on both market-related indicators and the capacity of the asset to generate future cash flows. Other choices presented do not align with the definitions set forth in these standards and would not provide the correct criteria for determining recoverable amounts.