Meaning
An accounting calculation represents the present value of the future cash flows expected to be derived from an asset or cash-generating unit. This measurement is known as the value in use, which reflects the entity-specific value of an asset rather than its market value. The metric does not apply to assets that are held for immediate disposal or those with no expected future cash flows.
Future Benefit
Cash projections are based on the most recent financial budgets approved by management. When calculating the value in use, the estimated cash inflows and outflows are projected over a maximum period of five years. This projection represents the operational utility of the asset.
Rate Selection
Discount rates applied to the cash flows must reflect current market assessments of the time value of money and the risks specific to the asset. Setting the rate for the value in use calculation requires estimating the weighted average cost of capital or the incremental borrowing rate. This discount rate ensures that future cash flows are properly adjusted to their current value to prevent overstating long-term assets.
Asset Comparison
Impairment evaluations compare the carrying value against the higher of the sale value or the operational value. The value in use represents the operational benchmark in this comparison. This prevents unnecessary write-downs.
