Composition of estimates of future cash flows

Learning objectives

• Identify the cash flows to be included (inflows from continuing use, necessary outflows including attributable overheads and maintenance, net cash flows on disposal at the end of the useful life) and those to be excluded to avoid double counting.L2
• Calculate the cash flows for a period and the net cash flow on final disposal of an asset or a unit.L2, L3

Normative references

• IAS 36 §39Specifies the content of the cash flows: inflows from continuing use, outflows necessarily incurred to generate them (including those to prepare the asset for use) allocated on a reasonable and consistent basis, and net cash flows on disposal at the end of the useful life.
• IAS 36 §41Projected outflows include those for the day-to-day servicing of the asset and future overheads that can be attributed directly, or allocated on a reasonable basis, to the asset.
• IAS 36 §42When the carrying amount does not yet include all the outflows to be incurred before the asset is ready for use or sale (building under construction, development project not yet completed), those remaining outflows are included in the projections.
• IAS 36 §43To avoid double counting, excludes cash inflows from assets that generate cash inflows that are largely independent (for example, receivables) and cash outflows relating to obligations already recognised as liabilities.
• IAS 36 §49Outflows necessary to maintain the level of economic benefits expected from the asset in its current condition are taken into account; when a CGU consists of assets with different useful lives, the replacement of assets with shorter lives and of components is part of day-to-day servicing.
• IAS 36 §52The net cash flow on disposal at the end of the useful life is the amount the entity expects to obtain from the disposal in an arm's length transaction between knowledgeable, willing parties, after deducting the estimated costs of disposal.
• IAS 36 §53This final disposal cash flow is determined in a similar way to fair value less costs of disposal, but using prices prevailing at the date of the estimate for similar assets that have reached the end of their useful life and operated under similar conditions, adjusted for the effect of future general and specific price changes.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

20 questions

• Panifor is calculating the value in use of an industrial bread production line. Which of the following cash flows must be included in the projections? (several answers)L2
• For a refrigerated transport cash-generating unit (CGU), Glacéo must avoid any double counting in its value in use projections. Which of the following cash flows must it exclude? (several answers)L2
• The Ostréa group is testing a cannery. Its central IT department, accounting services and pooled purchasing work for all the group's plants. Management control has a stable allocation key, based on volumes produced, which each year allocates a share of these costs to the cannery. How should these overheads be treated in the cannery's value in use?L2
• The Thermalis spa forms a cash-generating unit (CGU) comprising a building with a long useful life and circulation pumps that must be replaced every four years to maintain the current level of service. For year 3 of its projections, operating outflows excluding the pumps amount to 300,000 and the replacement of the pumps, planned for that year, will cost 60,000. The finance director proposes to exclude this replacement, which he describes as an investment. What amount of outflows should be used for year 3?L3
• For the first projection year of the value in use of a sawmill, Brisac's analyst included: (A) cash receipts from future sales of sawn timber; (B) collection of 120,000 of trade receivables in the statement of financial position at the test date; (C) day-to-day servicing expenditure on the saws; (D) a share of head-office costs allocated using a reasonable key. Which item is wrong?L2
• Tolvane is estimating the net disposal cash flow of a folding machine that will be sold at the end of its useful life, in eight years. Its analyst: (A) starts from the amount that knowledgeable, willing parties would obtain in a disposal; (B) adjusts this price for the expected effects of general and specific future price changes up to the disposal date; (C) uses as a basis the current price of an identical new folding machine; (D) deducts the estimated costs of disposal. Which step is wrong?L3
• Panelis is preparing year 1 of the value in use projections for an insulating panel production line. It expects {sales_receipts} of receipts from the line's future sales, {operating_payments} of payments for materials and staff, {allocated_overheads} of overheads allocated to the line using a reasonable key and {maintenance} of day-to-day servicing. Its cash forecast also contains the collection of {opening_receivables} of trade receivables and the payment of {recognised_payables} of trade payables, both recognised in the statement of financial position at the test date. What net cash flow should be used for year 1?L2
• The Belcastel hotel group is assessing the value in use of a mountain hotel. For the next year, it expects {guest_receipts} of accommodation and catering receipts, {staff_and_supplies} of wages and supplies, {booking_costs_share} for the share of the central booking office charged to the hotel on a reasonable and consistent basis, and {routine_repairs} of small routine repairs. The controller also added {guest_receivables} of customer invoices already issued but not yet collected at the test date, and deducted {litigation_provision} for the settlement of a lawsuit already provided for in the statement of financial position. What net cash flow should be used for the year?L2
• Carvelle must estimate the net disposal cash flow of a milling machine that it will sell at the end of its useful life. Today, similar milling machines that have reached the end of their life under comparable conditions of use trade at {end_of_life_price} between knowledgeable, willing parties. The general and specific price change expected until the disposal date is estimated at {price_change} in total (given). Costs of disposal at that date are estimated at {disposal_costs}. An identical new milling machine currently costs {new_machine_price}. What net disposal cash flow should Carvelle use?L3
• The haulier Transalpe is testing a fleet of trucks that it will resell as a whole at the end of its useful life. The used market today values at {used_fleet_price} a similar fleet that has reached the same end of life after comparable use. Transalpe estimates at {price_change} the cumulative effect of general and specific price changes until the resale (given). At that date, the sale will involve {dealer_commission} of dealer commission and {legal_costs} of legal costs. An equivalent new fleet is worth {new_fleet_price}. What net disposal cash flow should be used in value in use?L3
• Melvane is preparing the last projection year of an injection moulding press, which will be sold at the end of that year. It expects {operating_receipts} of operating receipts, {operating_payments} of operating payments and {allocated_overheads} of reasonably allocated overheads. The disposal should bring in {disposal_proceeds} between knowledgeable, willing parties, with {disposal_costs} of costs of disposal. Its model also includes {income_tax} of income tax and {interest} of loan interest. What total cash flow should be used for this last year?L3
• The Port-Aurel salt works are in the last operating year of their harvesting equipment. This year's value in use model includes: salt sales collected {salt_sales}, production payments {production_payments}, a reasonably allocated share of central costs {overhead_share}, day-to-day servicing {routine_maintenance}, sale of the equipment at year-end to knowledgeable, willing parties {equipment_sale}, with {sale_costs} of costs of disposal. The treasurer has also entered the repayment of a loan of {loan_repayment} and the payment of {environmental_provision} under an environmental provision already recognised. Determine the total cash flow for this last year.L3
• Calanque Résidences is building a hotel whose carrying amount already includes 4,000,000 of work done. Another 1,500,000 of work remains to be paid during year 1 before the hotel is ready for use. A partial opening at the end of year 1 should generate 200,000 of receipts and 120,000 of operating payments. Management is testing the hotel at the year-end. What net cash flow should be used for year 1 in value in use?L3
• True or false? Since value in use relates to the asset in its current condition, the future maintenance expenditure needed to keep the level of benefits that an industrial furnace provides today must be excluded from the projected cash outflows.L3
• Brenvale is estimating the value in use of a bottling line in its current condition. Which of the following cash flows must be included in the projections?L2
• Halvero is preparing the value in use of its foundry unit at 31 December 20X1. It is not committed to any restructuring and has incurred no enhancement expenditure. Which of the following cash flows must be excluded from the projections?L3
• The controller of Pélagor is justifying the value in use projections of a cash-generating unit made up of a vessel and deck equipment with a shorter useful life. Which of the controller's statements are correct?L4
• Aubelune operates a four-star hotel, tested as a cash-generating unit at 31 December 20X1. Every year, it refreshes rooms (paint, bedding) to keep its current standard. Management has also approved a project to upgrade to five stars, with works planned in 20X3 and higher room rates afterwards; no works had been incurred at the year-end. Which projections comply with IAS 36?L4
• Néridia, a network operator, is testing the cash-generating unit of its regional fixed network at 31 December 20X1. The budget approved by management includes a fibre upgrade programme, not yet started, that would cost 40,000,000 and sharply increase revenue per subscriber. Without this programme, value in use would be below the carrying amount; with it, value in use exceeds it. The budget also provides for the regular replacement of the network's active equipment, whose useful life is shorter than that of the infrastructure. The finance director argues that, since the budget is approved, all its lines must be used. Write a judgement memo on how the cash flows should be built.L4
• Which of the following cash flows are excluded from the estimate of the value in use of a Lumbreval workshop?L2