Which of the following describes the recoverable amount of an asset?

The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and its value in use. This concept is crucial in assessing whether an asset may be impaired. Fair value considers what an asset could be sold for in an active market, minus any costs associated with that sale, whereas value in use takes into account the present value of future cash flows expected to be derived from the asset.

By comparing these two amounts, businesses can determine the maximum value that the asset can generate, which is fundamental for ensuring that assets are not overstated on the balance sheet. This comparison reflects a realistic evaluation of an asset's worth, taking into consideration both market conditions and the asset's utility in generating cash flows over time.

Understanding this definition helps in identifying when to test for impairment, as if the carrying amount exceeds the recoverable amount, an impairment loss must be recognized. This approach aligns with the principles of financial reporting, ensuring that assets are reported accurately according to their potential economic benefits.