How is value in use calculated under IAS 36?

Core rule Under IAS 36, value in use (VIU) is the present value of estimated future cash flows expected to be derived from an asset or cash-generating unit (CGU), discounted at a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks. How it works The IAS 36 Value in Use Calculation requires assembling two components: a cash flow forecast and an appropriate discount rate. The standard is prescriptive about both. - Cash flow projections (IAS 36.33–36.35): Forecasts must be based on reasonable and supportable assumptions, reflect management's best estimate, and cover a maximum of five years unless a longer period can be justified. Beyond the explicit forecast horizon, a terminal (continuing) value is calculated using a steady-state growth rate that must not exceed the long-run average for the product, industry, or country (IAS 36.36). - What to include and exclude (IAS 36.39–36.44): Include pre-tax cash inflows from the asset's continued use and disposal, maintenance capex to maintain current performance levels, and any restructuring already committed. Exclude cash flows from future uncommitted restructurings, improvements that enhance performan

How do you derive the pre-tax discount rate iteratively from a post-tax WACC under IAS 36.55?

ce above current levels, financing cash flows (interest payments/receipts), and income tax cash flows — consistency with the pre-tax discount rate is essential (IAS 36.50). - Discount rate (IAS 36.55–36.57): Use a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. In practice, a post-tax WACC (from CAPM or comparable market data) is adjusted iteratively to derive its pre-tax equivalent. The rate must be asset/CGU-specific — a group-wide WACC applied uniformly is a common audit flag. - Terminal value: Typically calculated as a Gordon Growth Model perpetuity: Terminal Value = Normalised Free Cash Flow in final year × (1 + g) ÷ (r − g), where g is the sustainable growth rate and r is the discount rate. This terminal value is then discounted back to the valuation date. - Sensitivity analysis (IAS 36.134(f)): For CGUs with significant goodwill or indefinite-life intangibles, entities must disclose how VIU changes under a reasonably possible shift in key assumptions (e.g., +100 bps on discount rate or –10% on revenue growth). Practical example Scenario: A CGU has the following pre-tax free cash flows forecast. Pre-tax discount rat

When must a CGU be tested for impairment annually regardless of indicators, and how is goodwill allocated across CGUs under IAS 36.80?

e: 12%. Terminal growth rate: 2%. Carrying amount of CGU: €4,200. | Year | Cash Flow (€000) | Discount Factor (12%) | PV (€000) | |------|-----------------|----------------------|-----------| | 1 | 600 | 0.893 | 536 | | 2 | 650 | 0.797 | 518 | | 3 | 700 | 0.712 | 498 | | 4 | 720 | 0.636 | 458 | | 5 | 740 | 0.567 | 420 | | Terminal Value* | 7,548 | 0.567 | 4,279 | | VIU | | | 6,709 | *Terminal value = 740 × 1.02 ÷ (0.12 − 0.02) = €7,548k Since VIU of €6,709k exceeds carrying amount of €4,200k, no impairment arises (IAS 36.18). However, if VIU were €3,900k, an impairment loss of €300k is recognised: | Account | Dr (€000) | Cr (€000) | |---|---|---| | Impairment loss (P&L) | 300 | | | Accumulated impairment — CGU assets | | 300 | The loss is allocated first against goodwill, then pro-rata across other assets in the CGU down to their individual recoverable amounts (IAS 36.104). Common pitfalls - Using post-tax cash flows with a post-tax rate without reconciling to pre-tax equivalents. IAS 36.BCZ85 confirms that while mathematically equivalent in theory, deferred tax timing differences frequently cause divergence — auditors will test the pre-tax iterative computation directly. - Including optimi

How is a previously recognised impairment loss reversed under IAS 36.114–36.117, and what are the limits on reversal for goodwill?

stic cash flows beyond the five-year ceiling without justification. Boards often pressure finance teams to extend projections to absorb goodwill. Any period beyond five years requires explicit evidence (IAS 36.35(b)) — a contractual pipeline or regulatory concession, not just business optimism. - Applying a single group WACC across CGUs with materially different risk profiles. A retail CGU and an emerging-market manufacturing CGU carry distinct risk premiums. IAS 36.56 explicitly requires adjusting for asset-specific risks; uniform rates are a top impairment audit finding. Key paragraphs to know - IAS 36.30–36.31 — Definition of value in use and its two core components (cash flows + discount rate) - IAS 36.33–36.36 — Cash flow projection requirements including the five-year cap and terminal growth rate constraint - IAS 36.50–36.51 — Items excluded from cash flows (tax, financing) and consistency with the pre-tax discount rate - IAS 36.55–36.57 — Discount rate determination: pre-tax, market-consistent, asset-specific - IAS 36.104 — Order of impairment loss allocation within a CGU (goodwill first) - IAS 36.134 — Disclosure requirements for CGUs containing goodwill, including sensitivity analy

IAS 36 Value in Use Calculation

IAS 36 Value — Core Rule

Under IAS 36, value in use (VIU) is the present value of estimated future cash flows expected to be derived from an asset or cash-generating unit (CGU), discounted at a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks.

How IAS 36 Value Works

The IAS 36 Value in Use Calculation requires assembling two components: a cash flow forecast and an appropriate discount rate. The standard is prescriptive about both.

Cash flow projections (IAS 36.33–36.35): Forecasts must be based on reasonable and supportable assumptions, reflect management's best estimate, and cover a maximum of five years unless a longer period can be justified. Beyond the explicit forecast horizon, a terminal (continuing) value is calculated using a steady-state growth rate that must not exceed the long-run average for the product, industry, or country (IAS 36.36).

What to include and exclude (IAS 36.39–36.44): Include pre-tax cash inflows from the asset's continued use and disposal, maintenance capex to maintain current performance levels, and any restructuring already committed. Exclude cash flows from future uncommitted restructurings, improvements that enhance performance above current levels, financing cash flows (interest payments/receipts), and income tax cash flows — consistency with the pre-tax discount rate is essential (IAS 36.50).

Discount rate (IAS 36.55–36.57): Use a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. In practice, a post-tax WACC (from CAPM or comparable market data) is adjusted iteratively to derive its pre-tax equivalent. The rate must be asset/CGU-specific — a group-wide WACC applied uniformly is a common audit flag.

Terminal value: Typically calculated as a Gordon Growth Model perpetuity: Terminal Value = Normalised Free Cash Flow in final year × (1 + g) ÷ (r − g), where g is the sustainable growth rate and r is the discount rate. This terminal value is then discounted back to the valuation date.

Sensitivity analysis (IAS 36.134(f)): For CGUs with significant goodwill or indefinite-life intangibles, entities must disclose how VIU changes under a reasonably possible shift in key assumptions (e.g., +100 bps on discount rate or –10% on revenue growth).

IAS 36 Value — Practical Example

Scenario: A CGU has the following pre-tax free cash flows forecast. Pre-tax discount rate: 12%. Terminal growth rate: 2%. Carrying amount of CGU: €4,200.

Year	Cash Flow (€000)	Discount Factor (12%)	PV (€000)
1	600	0.893	536
2	650	0.797	518
3	700	0.712	498
4	720	0.636	458
5	740	0.567	420
Terminal Value*	7,548	0.567	4,279
VIU			6,709

*Terminal value = 740 × 1.02 ÷ (0.12 − 0.02) = €7,548k

Since VIU of €6,709k exceeds carrying amount of €4,200k, no impairment arises (IAS 36.18). However, if VIU were €3,900k, an impairment loss of €300k is recognised:

Account	Dr (€000)	Cr (€000)
Impairment loss (P&L)	300
Accumulated impairment — CGU assets		300

The loss is allocated first against goodwill, then pro-rata across other assets in the CGU down to their individual recoverable amounts (IAS 36.104).

IAS 36 Value — Common Pitfalls

Using post-tax cash flows with a post-tax rate without reconciling to pre-tax equivalents. IAS 36.BCZ85 confirms that while mathematically equivalent in theory, deferred tax timing differences frequently cause divergence — auditors will test the pre-tax iterative computation directly.

Including optimistic cash flows beyond the five-year ceiling without justification. Boards often pressure finance teams to extend projections to absorb goodwill. Any period beyond five years requires explicit evidence (IAS 36.35(b)) — a contractual pipeline or regulatory concession, not just business optimism.

Applying a single group WACC across CGUs with materially different risk profiles. A retail CGU and an emerging-market manufacturing CGU carry distinct risk premiums. IAS 36.56 explicitly requires adjusting for asset-specific risks; uniform rates are a top impairment audit finding.

IAS 36 Value — Key Paragraphs

IAS 36.30–36.31 — Definition of value in use and its two core components (cash flows + discount rate)
IAS 36.33–36.36 — Cash flow projection requirements including the five-year cap and terminal growth rate constraint
IAS 36.50–36.51 — Items excluded from cash flows (tax, financing) and consistency with the pre-tax discount rate
IAS 36.55–36.57 — Discount rate determination: pre-tax, market-consistent, asset-specific
IAS 36.104 — Order of impairment loss allocation within a CGU (goodwill first)
IAS 36.134 — Disclosure requirements for CGUs containing goodwill, including sensitivity analysis