Mid-upper arm circumference (MUAC) is increasingly used in identifying and admitting children with acute malnutrition for treatment. It is easy to use because it does not involve height assessment, but its use calls for alternative discharge criteria. This study examined how use of percentage weight gain as discharge criterion would affect the nutritional status of children admitted into a community-based management programme for acute malnutrition in rural southern Ethiopia. Non-oedematous children (n = 631) aged 6–59 months and having a MUAC of <125 mm were studied. By simulation, 10%, 15% and 20% weight was added to admission weight and their nutritional status by weight-for-height z-score (WHZ) was determined at each target. Moderate and severe wasting according to World Health Organization WHZ definitions was used as outcome. Applying the most commonly recommended target of 15% weight gain resulted in 9% of children with admission MUAC <115 mm still being moderately or severely wasted at theoretical discharge. In children with admission MUAC 115–124 mm, 10% of weight gain was sufficient to generate a similar result. Children failing to recover were the ones with the poorest nutritional status at admission. Increasing the percentage weight gain targets in the two groups to 20% and 15%, respectively, would largely resolve wasting but likely lead to increased programme costs by keeping already recovered children in the programme. Further research is needed on appropriate discharge procedures in programmes using MUAC for screening and admission.