The financial accounting term value-in-use is used to describe the present value of future cash flows derived from the use of an asset. Companies will determine an asset's value-in-use as part of a process that evaluates if an asset's value is impaired.
Value-in-Use = Present Value of the Asset's Benefits
If a company has reason to believe an asset's value may be impaired, it's required to perform a formal estimate of its recoverable amount. This approach is similar to the concept of lower of cost or market value, which applies to inventory. Specifically, IAS 36 provides guidance on this topic, stating: If the asset's fair value less the cost of disposal cannot be determined, the recoverable amount is equal to its value-in-use.
IAS 36 also provides guidance as to the factors to consider when determining an asset's value-in-use:
The cash flow projections should be based on supportable assumptions, including recent forecasts as well as planning budgets. Since companies normally forecast budgets for only five years, the analyst is permitted to extrapolate this data beyond those timeframes. The discount rate used when determining the present value of the benefits provided by the asset should be one of the following:
Note: Value-in use is normally estimated using a conservative approach that is "less than highest-and-best use" of the asset; therefore, the value will typically be lower than its fair market value.