What is value in use?

Explanation of value in use

Value in use is a measurement used in financial reporting to assess whether an asset is impaired. It represents the current worth of estimated future cash inflows and outflows arising from the continued use of an asset, discounted to reflect the time value of money and relevant risks.

In the UK, value in use is commonly applied under IAS 36 Impairment of Assets, as adopted in UK-adopted IFRS, and under Section 27 of FRS 102. It forms part of the impairment testing process, where an asset’s carrying amount is compared with its recoverable amount. Recoverable amount is the higher of fair value minus costs of disposal and value in use.

This concept ensures that assets are not carried in financial statements at amounts exceeding the economic benefits expected to be recovered from them.

Key characteristics of value in use

Key characteristics of value in use include the following:

• It is based on estimated future cash flows generated by an asset or cash-generating unit.
• It incorporates the time value of money through discounting.
• It reflects entity-specific assumptions rather than market participant assumptions.
• It includes cash flows from ongoing use and ultimate disposal of the asset.
• It is used primarily in impairment assessments within financial reporting frameworks.

How value in use works

The calculation of value in use typically involves the following steps:

1. Estimate future cash inflows and outflows from continued use of the asset.
2. Determine the period over which the asset is expected to generate cash flows.
3. Select an appropriate discount rate reflecting time value of money and risks specific to the asset.
4. Discount the projected cash flows to their present value.
5. The resulting figure is compared to the asset’s carrying amount to assess potential impairment.

Example of value in use in practice

A UK manufacturing company reviews a production line for impairment due to declining demand. Management forecasts future cash flows expected from continued use of the equipment over five years, including its estimated residual value. These cash flows are discounted to present value to determine the value in use. If this amount is lower than the carrying value in the accounts, an impairment loss may be recognised.

Common misconceptions about value in use

• Value in use does not mean the current market value of an asset.
• Value in use does not represent the original purchase price of an asset.
• Value in use is not based on speculative or hypothetical uses outside of the entity’s current operations.

Common questions for value in use

What is the difference between value in use and fair value?

Value in use is based on entity-specific cash flow projections from continued use. Fair value reflects the price that would be received to sell an asset in an orderly transaction between market participants.

When is value in use calculated?

Value in use is calculated during impairment testing, typically when there are indicators that an asset’s carrying amount may not be recoverable, or as part of annual impairment testing for certain assets such as goodwill.

What is included in value in use cash flows?

Cash flows include those directly attributable to the asset’s ongoing use and its eventual disposal, based on reasonable and supportable assumptions consistent with the entity’s expectations.

Is value in use the same as net present value?

Value in use uses a present value technique similar to net present value. However, it is applied specifically within financial reporting for impairment testing and follows the requirements of relevant accounting standards.