How To Calculate Value In Use Of An Asset

Expert DCF-based calculator for non-financial assets and cash-generating units.

Year	Cash Flow ($)	Discount Factor	Present Value ($)

What is How to Calculate Value in Use of an Asset?

Learning how to calculate value in use of an asset is fundamental for accountants, auditors, and financial analysts. Under International Financial Reporting Standards (IFRS), specifically IAS 36, the Value in Use (VIU) represents the present value of the future cash flows expected to be derived from an asset or a cash-generating unit (CGU).

Who should use this calculation? It is essential for businesses performing annual impairment tests on goodwill or when indicators suggest that an asset’s carrying amount might exceed its recoverable amount. A common misconception is that VIU is the same as Fair Value. While Fair Value reflects market participant assumptions, VIU reflects entity-specific expectations of how the asset will be used within the business.

Value in Use Formula and Mathematical Explanation

The process of how to calculate value in use of an asset involves two main phases: the explicit projection period and the terminal period. The math relies on the Discounted Cash Flow (DCF) model.

The core formula is:

VIU = [Σ (CF_t / (1 + r)^t)] + [TV / (1 + r)ⁿ]

Variables Explained

Variable	Meaning	Unit	Typical Range
CFt	Net Cash Flow in Year t	Currency ($)	Projected based on budgets
r	Discount Rate (WACC)	Percentage (%)	7% – 15%
n	Number of years in projection	Years	3 – 5 years
TV	Terminal Value	Currency ($)	Gordon Growth Method

Practical Examples (Real-World Use Cases)

Example 1: Manufacturing Equipment

A company needs to determine how to calculate value in use of an asset for a specialized CNC machine.

• Year 1 Cash Flow: $20,000
• Growth Rate: 3%
• Projection: 5 Years
• Discount Rate: 8%

Result: The machine’s VIU would be approximately $268,500 including terminal value, assuming it maintains a steady 2% long-term growth.

Example 2: Software License (Intangible Asset)

A tech firm evaluates a proprietary software module.

• Year 1 Cash Flow: $100,000
• Growth Rate: 10%
• Discount Rate: 12%
• Terminal Growth: 0% (Asset obsolescence)

Result: Using the how to calculate value in use of an asset methodology, the VIU is determined to be roughly $850,000.

How to Use This Value in Use Calculator

1. Enter Year 1 Cash Flow: Input the net cash inflows you expect the asset to generate in its first full year of operation.
2. Set the Growth Rate: Estimate how much these cash flows will increase annually over your projection period.
3. Define the Discount Rate: Use the Weighted Average Cost of Capital (WACC) or a pre-tax rate that reflects the specific risks of the asset.
4. Set Projection Years: Standard accounting practice usually limits this to 5 years unless a longer period is justified.
5. Terminal Growth: Enter the rate at which the asset will grow indefinitely after the projection period (usually matches inflation or GDP growth).
6. Review Results: The calculator instantly provides the total VIU, broken down by year and terminal value.

Key Factors That Affect Value in Use Results

• Discount Rate Sensitivity: Small changes in the WACC can lead to massive swings in the final VIU.
• Cash Flow Reliability: Projections must be based on reasonable and supportable assumptions (IAS 36).
• Terminal Growth Rate: This should not exceed the long-term average growth rate for the products, industries, or country.
• Asset Life: Physical wear and tear or technological obsolescence determines how many years of cash flow are realistic.
• Macroeconomic Conditions: Inflation and interest rates directly impact the discount rate used.
• Risk Premium: Specific risks related to the asset’s location or technology must be factored into the discount rate.

Frequently Asked Questions (FAQ)

1. Is Value in Use the same as Net Present Value (NPV)?

Yes, VIU is essentially the NPV of an asset’s future cash flows, but it specifically follows the rules set by IAS 36 for impairment testing.

2. Why use a pre-tax discount rate?

IAS 36 requires a pre-tax rate because the cash flows themselves are usually projected on a pre-tax basis to avoid the complexities of deferred tax accounting.

3. What if the asset has a negative cash flow?

When learning how to calculate value in use of an asset, you must include all expected outflows. If the total PV is negative, the VIU is effectively zero.

4. Can I use this for goodwill?

Yes, but goodwill must be tested at the Cash-Generating Unit (CGU) level rather than for the specific intangible asset alone.

5. How do I handle the disposal of the asset?

The final year of cash flows should include the net proceeds expected from the disposal of the asset at the end of its useful life.

6. Is inflation included in the growth rate?

Usually, yes. If the discount rate is nominal, the cash flow growth should also be nominal (including inflation).

7. What is a “Cash Generating Unit” (CGU)?

The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets.

8. How often should I calculate VIU?

At least annually for intangible assets with indefinite lives (like goodwill) or whenever there is an “indicator of impairment” for tangible assets.