The Sensitivity table shows that the model is highly susceptible to changes in assumptions. We will prepare a Discounted Cash Flow (DCF) model for a cash-generating unit within a company.įirst, we forecast the performance of the CGU for the next five years. To shed more light on the VIU calculation, let us look at a practical model. Join our Newsletter for a FREE Excel Benchmark Analysis Template Example Value in Use Calculation Keep in mind that as the discount factor already covers the inherent business risks and the time value of money concept, we exclude interest and dividends from the value in use calculation. Therefore, we have to remember to include these items in the carrying value as well. For practical reasons, the VIU often includes items relating to working capital and others. It’s essential to be consistent in determining the carrying value of a CGU and the related cash flows. In other words, we use accounting depreciation to calculate the income tax charge for the value in use. Such would be a very complex calculation, so we assume the tax base is identical to the carrying value of the asset. Ideally, we should calculate tax payments as if the tax base of the asset or CGU is equal to its recoverable amount. In such cases, tax cash flows for VIU calculations are not the same as the company expects to pay. However, observable market rates are usually post-tax. Pre-tax and post-taxĪs of now, IAS 36 requires that we calculate the value in use with pre-tax cash flows and a pre-tax discount rate. In practice, the Weighted Average Cost of Capital (WACC) is the most common discount factor when we calculate the recoverable amount of an asset or CGU. Therefore we use industry benchmarks by running comparative analysis against businesses operating in similar conditions. The discount factor should not be specific to the capital structure of the company. The most proper discount rate is the one that the company can obtain to finance a separate asset with the same cash flows and risk patterns. Once we start with our value in use model, it is critical to determine the correct discount factor. We must be able to identify and separate the cash flows relevant to the CGU. Whenever this approach is not practical, we calculate for the smallest identifiable CGU that contains the asset. We determine value in use for each separate asset. Impairment is then the difference between the carrying value and the recoverable amount. Value in use represents the future expected cash flows from the continuing use of an asset and its disposal, discounted to reflect the underlying risk and the time value of money concept. To calculate the VIU, we estimate the present amount of the future cash flows that we expect to derive from the asset or CGU. We can either sell it, and the net proceeds will be the fair value less cost to sell, or we can use it and transfer benefits over to the business via the revenues or savings the asset generates less the associated costs. This follows the assumption that there are two ways a company can get value out of an asset. The latter is the present net worth of the asset or cash-generating unit (CGU). Under IAS 36, the recoverable amount is the higher of the asset’s fair value less cost to sell and its value in use.
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