IAS 36 - Value in use estimating future cash inflows and outflows

The articles in our ‘Insights into IAS 36’ series have been written to assist preparers of financial statements and those charged with the governance of reporting entities understand the requirements set out in IAS 36, and revisit some areas where confusion has been seen in practice.

This article is the second in a three-part series on Step 4 of the impairment review on estimating the recoverable amount and discusses estimating future cash inflows and outflows in value in use (VIU) calculations.

Estimating VIU involves the following:

1. Estimating the future cash inflows and outflows to be derived from continuing to use the asset and from its ultimate disposal
2. Applying the appropriate discount rate to those future cash flows.

The VIU estimate incorporates the following risk factors, either as adjustments to the cash flows or as adjustments to the discount rate, but not both:

• expectations about possible variations in the amount or timing of those future cash flows
• the price for bearing the uncertainty inherent in the asset
• other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows that the entity expects to derive from the asset.

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