Value in use

Value in use (VIU) is the present value of the future cash flows expected to be derived from an asset or cash-generating unit (CGU), calculated by discounting projected cash flows at a rate reflecting the time value of money and asset-specific risks. Under IAS 36, it is one of the two measures of recoverable amount, alongside fair value less costs of disposal (FVLCD): if the carrying amount of the CGU exceeds the higher of VIU and FVLCD, an impairment loss must be recognized. For companies with significant goodwill or long-lived intangible assets, the annual impairment test is a material financial reporting exercise, and the construction of value in use (cash flow projections, discount rate, projection horizon) is subject to auditor scrutiny.

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The VIU calculation follows specific rules that differ from a standard DCF business valuation: cash flows must reflect management's best estimate of the CGU's performance in its current condition (no restructuring not yet committed, no capacity expansions not yet approved), must use a pre-tax discount rate applied to pre-tax cash flows, and must include a terminal value. The pre-tax rate requirement creates a practical challenge: most market data provides post-tax WACCs, so a pre-tax equivalent is typically derived by iterating until pre-tax flows discounted at the pre-tax rate equal post-tax flows discounted at the post-tax WACC.

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Example: the value in use of a Swiss industrial CGU is calculated on 5 years of projected cash flows (CHF 1.5M to CHF 2.2M) discounted at a 9.5% WACC, plus a terminal value at 2.0% growth. Value in use: CHF 18.5 million. Compared to a CGU carrying value of CHF 16.0 million (including CHF 4.0 million of allocated goodwill), the CHF 2.5 million headroom confirms no impairment is required for the current year under IAS 36.

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At Hectelion, we perform IAS 36 impairment tests and VIU calculations for Franco-Swiss companies with goodwill and intangible assets in our valuation mandates, providing models that meet Big Four auditor standards for annual and trigger-event impairment reviews.