Value In UseEdit

Value in use (VIU) is a central concept in asset valuation and financial reporting. It represents the present value of the cash flows that a specific asset or a group of assets (a cash-generating unit) is expected to generate through its current use. VIU is rooted in the time value of money and in risk-adjusted expectations about future operating performance, and it plays a key role in impairment assessments, investment decisions, and budgeting processes. In practice, VIU is typically contrasted with other measures of value, such as market-based or disposal-based values, to determine how an asset should be carried on the books.

In many accounting frameworks, VIU serves as a basis for determining whether the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of VIU and the fair value less costs of disposal, meaning that an asset may be written down if its value in use falls short of its recorded value. This approach ties asset measurement to the entity’s own use expectations rather than solely to market prices, and it requires explicit projections of future revenue, costs, taxes, and investment needs. The concept is expressed through a combination of cash flow forecasts, assumptions about operating conditions, and an appropriate discount rate that reflects the time value of money and asset-specific risks. cash flows and discount rate are central to these calculations, as are assumptions about maintenance, capital expenditure, working capital, and regulatory or price environments that could affect future performance. The mathematics of VIU often involves discounting projected pre-tax cash flows to present value and summing them over the asset’s useful life or the CGU’s forecast horizon. present value is the mathematical foundation, while the treatment of taxes, inflation, and risk adjustments reflects the relevant accounting standards. pre-tax discount rate and taxes are commonly discussed elements in this context.

Value In Use

Definition and scope

Value in use refers to the present value of the future cash flows expected to be derived from an asset or a cash-generating unit in its current use. It is used to evaluate whether an asset is impaired and to determine the recoverable amount for impairment testing. The cash flows include consideration of revenues, operating expenses, changes in working capital, taxes, and the capital expenditures required to maintain or enhance the asset’s productive capacity. The concept relies on the assumption that the asset will continue to operate in its existing condition and use, rather than being sold or repurposed. Key terms in this area include recoverable amount, cash-generating unit, and impairment.

Calculation and estimation

Identify the asset or CGU to which VIU applies, ensuring alignment with the entity’s organizational structure and reporting units. cash-generating unit
Forecast pre-tax cash flows for a reasonable period, often covering multiple years, and include a terminal value if appropriate. The projection should reflect current operating plans, expected price and cost trajectories, and any regulatory or contractual requirements.
Select a discount rate that represents current market assessments of the time value of money and risks specific to the asset that are not already reflected in the cash flow projections. The rate is typically pre-tax and intended to capture asset-specific risk and the market environment. discount rate
Discount the forecasted cash flows to their present value and aggregate them to obtain VIU. Compare VIU to the asset’s carrying amount to assess potential impairment.
If the carrying amount exceeds VIU, an impairment loss may be recognized up to the amount of the excess. The measurement of impairment in this context is governed by the relevant accounting standards and may interact with other values such as fair value and costs of disposal in the determination of the recoverable amount.

Impairment testing under IFRS

Under many international standards, impairment testing requires comparing the carrying amount of an asset or CGU with its recoverable amount, where VIU is one possible basis for the recoverable amount. The recoverable amount is the higher of VIU and FV less costs of disposal, so both intrinsic use-based value and market-based considerations can influence impairment decisions. This framework emphasizes asset-specific use and economic fundamentals over purely market-driven prices when determining whether an asset remains worth carrying at its recorded value. Related concepts include IFRS and IAS 36 (the impairment standard under IFRS), as well as the broader notion of impairment measurement.

Practical considerations and limitations

VIU estimates are inherently projection-based and depend on assumptions about future demand, prices, costs, and technological or regulatory developments. As a result, VIU can be sensitive to changes in inputs such as the discount rate and revenue growth projections.
The use of VIU often involves judgments about the useful life of an asset, maintenance capital expenditure, and whether certain costs should be included in operating cash flows. Clear documentation of assumptions and methodologies is essential for auditability and comparability. cash flows, capital expenditure
Differences between IFRS and other frameworks (for example US GAAP impairment approaches) can lead to divergent impairment outcomes for the same asset, particularly in the way pre-tax versus after-tax cash flows are treated and how discount rates are selected. FVLCOD and recoverable amount are part of this broader discussion.
Critics emphasize the subjective nature of long-range VIU projections and caution against optimistic bias. Proponents argue that VIU reflects asset-specific value and the economic realities of ongoing use, rather than relying solely on market transactions or liquidation values. The balance between prudent estimation and realistic forecasting is a central theme in impairment discussions. See also discussions of valuation methods and projection uncertainty.

Jurisdictional differences and related concepts

Asset valuation practices vary by regulatory regime, with VIU playing a prominent role in IFRS-based reporting. In some jurisdictions, alternative impairment methodologies or additional disclosures accompany VIU-based assessments, including considerations of fair value, discount rate disclosures, and the sensitivity of impairment results to key assumptions. The relationship among VIU, FVLCOD, and impairments is frequently illustrated through examples involving long-lived assets, intangibles, and corporate CGUs. Related terms you may encounter include recoverable amount, impairment test, and cash-generating unit.