Value-in-Use

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:

• Cash Flow: includes an estimate of the future cash flows derived from the use of the asset. The accountant-analyst should also consider possible variations in the timing of the expected cash flows.

• Discount Rate: the calculation of value-in-use should take into consideration the time value of money, which is typically represented by the company's weighted average cost of capital. This rate is then used to discount the asset's benefits over time.

• Other: includes factors such as liquidity, or the ability to sell the asset.

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:

• The company's weighted average cost of capital (pre-tax)

• The company's incremental cost to borrow

• The borrowing rate found in "other" markets

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.

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