Value in Use Calculator

An essential tool for asset impairment testing under IFRS (IAS 36), financial analysis, and strategic decision-making.

Total Value in Use (VIU)

$0.00

PV of Forecast Cash Flows

$0.00

Terminal Value

$0.00

PV of Terminal Value

$0.00

Formula: The calculation of value in use is the sum of the Present Value (PV) of cash flows over the forecast period and the PV of the terminal value. Terminal value represents all cash flows beyond the forecast period, grown in perpetuity.

Annual Cash Flow Projection

Year	Projected Cash Flow	Discount Factor	Present Value

This table breaks down the calculation of value in use on a year-by-year basis.

What is Value in Use?

Value in Use (VIU) is a critical financial metric representing the present value of future cash flows expected to be derived from an asset or a cash-generating unit (CGU). It is an entity-specific measurement, meaning it reflects the value an asset brings to the current owner, based on their specific plans for its use. This concept is a cornerstone of International Accounting Standard (IAS) 36, which governs the impairment of assets. An asset is considered impaired if its carrying amount (the value on the balance sheet) exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its calculation of value in use.

This calculation is essential for accountants, financial analysts, and corporate managers. It is primarily used to perform impairment tests on tangible assets (like machinery and buildings) and intangible assets (like goodwill and patents). Understanding the Value in Use helps an organization ensure its balance sheet does not overstate asset values, providing a more accurate picture of its financial health.

Common Misconceptions

• VIU vs. Fair Value: A common mistake is equating Value in Use with fair value. Fair value is the price an asset would sell for in an open market transaction, reflecting market participant assumptions. In contrast, VIU is an internal valuation based on how the entity itself plans to use the asset, which may include synergies not available to other market participants.
• VIU vs. Market Value: Market value is a type of fair value. The calculation of value in use is fundamentally different because it is not based on a potential sale price but on continued operational use.

Value in Use Formula and Mathematical Explanation

The calculation of value in use is a multi-step process rooted in the principles of discounted cash flow (DCF) analysis. The core idea is that money in the future is worth less than money today. The formula can be expressed as:

VIU = Σ [CF_i / (1 + r)^i] + [TV / (1 + r)^n]

This process involves two main components:

1. Present Value of Explicit Forecast Cash Flows: Future cash flows are projected for a specific period (usually up to 5 years). Each year’s cash flow is then discounted back to its present value.
2. Present Value of the Terminal Value: Since an asset can generate cash flows beyond the forecast period, a “terminal value” is calculated. This represents the value of all cash flows from the end of the forecast period into perpetuity, assuming a stable growth rate. This terminal value is then also discounted back to its present value.

The sum of these two components gives the total Value in Use.

Variables Table

Variable	Meaning	Unit	Typical Range
CF_i	Net cash flow in period ‘i’	Currency ($)	Varies
r	Pre-tax discount rate	Percentage (%)	5% – 15%
i	The specific year in the forecast period	Year	1 to n
n	The number of years in the forecast period	Years	3 – 10
TV	Terminal Value (at year n)	Currency ($)	Varies
g	Perpetual growth rate	Percentage (%)	0% – 3%

Practical Examples (Real-World Use Cases)

Example 1: Manufacturing Company’s Machinery

A company owns a specialized manufacturing machine with a carrying value of $500,000. Due to new technology, the company must test it for impairment.

• Inputs:
  • Year 1 Cash Flow: $90,000
  • Cash Flow Growth Rate: 2% (for 5 years)
  • Forecast Period: 5 years
  • Discount Rate: 10%
  • Perpetual Growth Rate: 1.5%
• Outputs from the Value in Use calculation:
  • PV of Forecast Cash Flows: $358,045
  • PV of Terminal Value: $687,698
  • Total Value in Use: $1,045,743
• Interpretation: The calculated Value in Use ($1,045,743) is higher than the carrying amount ($500,000). Therefore, the asset is not impaired. A Discounted Cash Flow (DCF) model confirms this outcome.

  Example 2: Tech Company’s Software Patent

  A tech firm acquired a software patent as part of a business acquisition, recorded with goodwill. The patent is part of a Cash-Generating Unit (CGU) that needs its annual impairment test.

  • Inputs:
    • Year 1 Cash Flow: $2,000,000
    • Cash Flow Growth Rate: 15% (for 3 years, then declining)
    • Forecast Period: 5 years
    • Discount Rate: 12%
    • Perpetual Growth Rate: 2.5%
  • Outputs from the Value in Use calculation:
    • PV of Forecast Cash Flows: $8,540,112
    • PV of Terminal Value: $19,451,330
    • Total Value in Use: $27,991,442
  • Interpretation: The firm compares this Value in Use to the CGU’s carrying amount. If the carrying amount is higher, an impairment loss must be recognized, first against goodwill, then other assets. This shows why the calculation of value in use is essential for M&A accounting.

How to Use This Value in Use Calculator

This tool simplifies the complex calculation of value in use. Follow these steps:

1. Enter Year 1 Net Cash Flow: Input the estimated cash flow the asset will generate in the first year.
2. Set Cash Flow Growth Rate: Enter the expected annual growth rate for cash flows during the forecast period.
3. Define Forecast Period: Choose the number of years (1-10) for your explicit cash flow forecast. 5 years is a common standard.
4. Set the Discount Rate: This is crucial. Enter the pre-tax rate that reflects the specific risks of the asset. It is often based on the company’s Weighted Average Cost of Capital (WACC).
5. Set the Perpetual Growth Rate: Enter the long-term rate at which you expect cash flows to grow forever. This must be lower than the discount rate.
6. Analyze the Results: The calculator instantly provides the total Value in Use, the PV of the forecast cash flows, and the PV of the terminal value. Use the table and chart to understand the year-by-year breakdown and the impact of discounting. For more advanced modeling, a Present Value Calculator can be a useful related tool.

Key Factors That Affect Value in Use Results

The calculation of value in use is highly sensitive to its inputs. Understanding these factors is key to an accurate assessment.

• Cash Flow Projections: The quality of your forecast is the single most important factor. Overly optimistic or pessimistic projections will directly skew the Value in Use. They should be based on management-approved budgets.
• Discount Rate: A higher discount rate implies higher risk and a lower present value for future cash flows, thus reducing the VIU. A lower discount rate has the opposite effect.
• Perpetual Growth Rate: This rate has a significant impact on the terminal value, which often constitutes a large portion of the total Value in Use. A small change here can lead to a large change in the final result.
• Forecast Period Length: A longer explicit forecast period can capture more near-term growth nuances but also increases uncertainty. IAS 36 suggests a maximum of five years unless a longer period can be justified.
• Economic Conditions: Broader economic factors like inflation, interest rates, and industry trends can influence both cash flow projections and the appropriate discount rate.
• Asset Condition and Lifespan: The physical condition, technology obsolescence, and expected useful life of an asset directly impact the cash flows it can generate.

Frequently Asked Questions (FAQ)

1. What is the difference between Value in Use and Fair Value?

Value in Use is an entity-specific value based on an asset’s expected use and cash flows within the company. Fair Value is a market-based measurement of what the asset could be sold for. An asset’s recoverable amount is the higher of these two values, a key concept in Asset Impairment testing.

2. What is a Cash-Generating Unit (CGU)?

A Cash-Generating Unit (CGU) is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets. When an individual asset doesn’t generate its own distinct cash flows, its Value in Use is determined as part of a CGU.

3. Why is the perpetual growth rate always lower than the discount rate?

Mathematically, if the growth rate were equal to or higher than the discount rate, the terminal value formula would result in a negative or infinite value. Economically, no company or asset can grow faster than the overall economy (which the discount rate reflects) forever.

4. Should the calculation of value in use be pre-tax or post-tax?

IAS 36 technically requires the use of pre-tax cash flows and a pre-tax discount rate. However, in practice, it is often easier to use post-tax cash flows and a post-tax discount rate (like a standard WACC), as long as the approach is applied consistently.

5. When is a Value in Use test required?

An entity must test an asset for impairment at the end of each reporting period if there is any indication of impairment. However, intangible assets with an indefinite useful life and goodwill acquired in a business combination must be tested for impairment annually, regardless of whether there is an indication of impairment, which involves a calculation of value in use.

6. What happens if the Value in Use is less than the carrying amount?

If the Value in Use (and also the Fair Value Less Costs to Sell) is less than the asset’s carrying amount, an impairment loss is recognized. This loss is the difference between the carrying amount and the recoverable amount. The asset’s value on the balance sheet is written down accordingly.

7. Can an impairment loss be reversed?

Yes, for most assets, if the recoverable amount increases in a future period, the prior impairment loss can be reversed. However, an impairment loss recognized for goodwill can never be reversed.

8. Does this calculator work for IFRS 13?

This calculator is designed for the Value in Use component of IAS 36. While related, IFRS 13 specifically defines the framework for measuring Fair Value, not VIU. The two standards work together to determine an asset’s recoverable amount.