How do you do a value in use calculation?
Project the cash flows
Use the most recent budgets approved by management, for at most five years unless a longer period is justified.
Estimate a terminal value
Extrapolate beyond the budget period with a steady or declining growth rate that does not exceed the long-term average for the products, industry or country.
Choose a pre-tax discount rate
Reflect current market assessments of the time value of money and the risks specific to the asset not already in the cash flows.
Discount and add up
The total is value in use.
A value in use example: a network unit
A telecom operator projects these cash flows for a network cash-generating unit, with a pre-tax discount rate of 10% and long-term growth of 2%.
| CU million | Cash flow | Discount factor at 10% | Present value |
|---|---|---|---|
| Year 1 | 120.0 | 0.9091 | 109.1 |
| Year 2 | 125.0 | 0.8264 | 103.3 |
| Year 3 | 130.0 | 0.7513 | 97.7 |
| Year 4 | 132.0 | 0.6830 | 90.2 |
| Year 5 | 135.0 | 0.6209 | 83.8 |
| Terminal value: 135 x 1.02 / (0.10 - 0.02) = 1,721.2 | 1,721.2 | 0.6209 | 1,068.8 |
| Value in use | 1,552.8 |
The terminal value provides 69% of the value in use, which is typical and shows why the long-term growth rate and discount rate deserve the most scrutiny. Against a carrying amount of CU 1,700 million, the unit is impaired by CU 147 million; see IAS 36 explained.
What can the cash flows include?
| Include | Exclude |
|---|---|
| Cash inflows from continuing use | Restructurings the company is not yet committed to |
| Cash outflows needed to generate them, including allocated overheads | Improvements or enhancements not yet made |
| Day-to-day servicing and maintenance capital expenditure | Financing cash flows and income tax |
| Net cash from disposal at the end of the asset's life | Cash flows of other assets or units |
How is the pre-tax discount rate set?
Usually by starting from the company's weighted average cost of capital, adjusting it for the risks of the specific unit and country, and converting it to a pre-tax rate. The pre-tax rate is not simply the post-tax rate grossed up by the tax rate: it is the rate that gives the same value in use when applied to pre-tax cash flows as the post-tax rate applied to post-tax cash flows. Many companies calculate on a post-tax basis and derive the equivalent pre-tax rate for disclosure.
How sensitive is the answer?
At a 9% discount rate the same unit has a value in use about CU 223 million higher; at 11%, about CU 173 million lower. One percentage point on the discount rate moves the answer by more than the whole impairment. IAS 36 requires companies to disclose, where a reasonably possible change in a key assumption would cause an impairment, how much the assumption would have to change. The sensitivity sheet of the Impairment test model (Excel) shows headroom for each combination of discount rate and growth.
Common mistakes
- Including growth from expansion capital expenditure not yet spent.
- Using a post-tax rate on pre-tax cash flows.
- Terminal growth above the long-term inflation or GDP growth of the market.
- Forecasts far above the unit's track record without explanation.
Need help applying the standards?
Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.
Questions people ask
What is value in use?
The present value of the future cash flows expected from an asset or cash-generating unit in its current condition.
How many years should a value in use calculation cover?
Projections should cover at most five years unless a longer period is justified, followed by a terminal value.
What discount rate is used for value in use?
A pre-tax rate reflecting current market assessments of the time value of money and the asset's specific risks.
Can value in use include future expansion?
No. Cash flows must reflect the asset in its current condition, excluding uncommitted restructurings and enhancements.
Sources
Every fee, date and rule on this page was taken from these official and primary sources.
Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.
Related guides
More in IAS 36
This guide is general information. It is not tax or legal advice for your situation.