Elements and steps of value in use

Learning objectives

• Explain the elements reflected in value in use and the two steps of the calculation (estimating the cash flows, then discounting them).L1, L2
• Distinguish value in use from fair value: entity-specific factors (synergies, legal rights, tax benefits) are excluded from fair value.L2, L3
• Calculate a simple value in use by discounting annual cash flows.L2

Normative references

• IAS 36 §30Lists the elements to be reflected in value in use: an estimate of the future cash flows the entity expects to derive from the asset, expectations about possible variations in their amount or timing, the time value of money (current market risk-free rate), the price for bearing the uncertainty inherent in the asset and other factors, such as illiquidity, that market participants would reflect.
• IAS 36 §31Describes the two steps of the calculation: estimating the future cash inflows and outflows to be derived from continuing use of the asset and from its ultimate disposal, and applying an appropriate discount rate to them.
• IAS 36 §32States that the elements of paragraph 30 relating to variations in cash flows, the price for bearing uncertainty and other factors (including illiquidity) may be reflected either in the cash flows or in the discount rate, Appendix A setting out present value techniques (traditional approach or expected cash flow approach).
• IAS 36 §53AContrasts fair value with value in use: the former reflects the assumptions of market participants, the latter entity-specific factors (synergies, value from grouping assets, legal rights or restrictions specific to the entity, tax benefits or burdens specific to the entity).

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

13 questions

• True or false? Calculating value in use involves two steps: estimating the future cash inflows and outflows from continuing use of the asset and from its ultimate disposal, then applying an appropriate discount rate to them.L1
• True or false? Value in use is limited to a single scenario of future cash flows: expectations about possible variations in the amount or timing of those cash flows do not need to be reflected in it.L1
• Which of the following is one of the elements that the calculation of an asset's value in use must reflect?L1
• True or false? The fair value of a warehouse includes the specific synergies that its current owner obtains from combining the warehouse with its own network of stores.L2
• To calculate the value in use of a fishing vessel, Morvent's analyst must reflect the price for bearing the uncertainty inherent in the vessel and its illiquidity. How can these elements be incorporated?L2
• Which of the following are entity-specific factors, not available to other market participants, that value in use may reflect whereas fair value does not reflect them? (several answers)L2
• The Tessaro group is testing a biscuit factory. The factory supplies the group's exclusive distribution network, which gives it synergies that no other buyer would obtain. The head of strategy prepares both the fair value less costs of disposal and the value in use of the factory. Which statements are correct? (several answers)L3
• Fabrel estimates the net cash flows that an extrusion machine will generate over its remaining useful life of three years, including the ultimate disposal flow: {cash_flow_year_1} in the first year, {cash_flow_year_2} in the second and {cash_flow_year_3} in the third. The cash flows are assumed to be received at the end of each year. The discount rate used (given) is {discount_rate}. What is the value in use of the machine?L2
• A river shipowner, Navilia, operates a barge with three operating years remaining. After all necessary outflows and the final net disposal proceeds, the expected cash surpluses amount to {inflow_year_1} at the end of the first year, {inflow_year_2} at the end of the second, when an exceptional charter contract is planned, and {inflow_year_3} at the end of the last. Navilia discounts these amounts at the given rate of {discount_rate}. Determine the value in use of the barge.L2
• The Ardéco printing works is testing a rotary press with a carrying amount of {carrying_amount} that will be used for two more years. The expected net operating cash flows, received at year-end, are {cash_flow_year_1} for year 1 and {cash_flow_year_2} for year 2. At the end of year 2, reselling the press should provide a net cash flow of {net_disposal_flow}. The discount rate (given) is {discount_rate}. Current fair value less costs of disposal is {fvlcd}. Calculate value in use, recoverable amount and the impairment loss.L2
• A veterinary clinic, Vetalpe, is reviewing a scanner carried in its statement of financial position at {carrying_amount}. It has two years of use left. The finance department expects {operating_flow_1} of net operating cash at the end of the first year, then {operating_flow_2} at the end of the second, when the device would be sold to a refurbisher for an amount net of costs of disposal of {scrap_proceeds_net}. The discount rate provided is {discount_rate}. A broker currently estimates the scanner's fair value less costs of disposal at {fvlcd}. Determine value in use, recoverable amount and the impairment loss.L2
• Marivel operates a port terminal. It holds, personally, a non-transferable administrative authorisation to operate the terminal at night; a buyer of the terminal could not rely on it. How is this authorisation taken into account in the two components of the terminal's recoverable amount?L3
• True or false? In value in use, the time value of money is represented by the current market risk-free rate of interest.L2