Value in use measurement

The value in use of an asset or liability (many times called fulfilment value for liabilities) is the discounted value of the future cash flows attributable to it. However, as cash flows are generated by businesses, or by units within businesses, rather than by individual assets, value in use is a basis of valuation applicable to businesses or business units rather than to separable assets and liabilities.

Value in use implies recognition of gains as they arise rather than as they are realised, but they are gains in the value of the business unit, rather than gains on transactions or in the values of separable net assets.

Where value in use is applied to a business or to a cash-generating unit, it implicitly incorporates in the valuation goodwill (whether acquired or internally generated) and any other unrecognised assets or liabilities (i.e, that would be unrecognised on other measurement bases).

Where it is attempted to apply value in use to individual assets or liabilities as traditionally conceived (for example, in recoverable amount tests), the valuation inevitably also incorporates goodwill and other intangibles in the valuation, as there is no way of dividing forecast cash flows into amounts that are attributable to separable recognised net assets, amounts attributable to separable but unrecognised assets, and amounts that are attributable to something else (goodwill).

Why we like value in use measurement?

As value in use is based on forecasts of future cash flows, it is only objective to the extent that the cash flows it is forecasting have already occurred (ie, between the balance sheet date and the date of preparation of the forecast) or are contractual commitments to which no doubt attaches.

Why we object value in use measurement?

Because they are based on predictions, most value in use calculations are subjective, and the longer the period covered by the forecast, the more subjective they become. The choice of discount rate is also subjective.

Why is value in use measurement relevant?

Information prepared on a value in use basis might be more relevant for some purposes than information prepared on other bases. For example, value in use information should be relevant to all those who have an interest in the present value of the business’s future cash flows: most obviously, investors, creditors, and employees. On certain assumptions, it provides a valuation of the business, and it is used for this purpose by investment analysts and private equity investors. Indeed, being based on future cash flows, value in use must be relevant to what standard-setters state to be the main purpose of financial reporting, assisting the forecasting of future cash flows.

Value in use also matches the economist’s concept of income. The economist’s concept of income is that ‘a man’s income is the maximum value which he can consume during a week, and still expect to be as well off at the end of the week as he was at the beginning. To measure income it therefore becomes necessary to measure well-offness, which it is usually considered means the present value of expected future income.

What do we hold against value in use measurement?

Value in use collapses forecast future cash flows into a value at a date in the recent past (the balance sheet date) by means of discounting. Profit or loss on this basis therefore becomes a measure of the change in expectations of the future between two dates in the past, and some users question whether this is a valid measure of actual past performance. This point reflects a more wide-ranging criticism of the economist’s concept of income (see as a measure of business performance.

It can also be argued that the usefulness of value in use information is limited unless there is full disclosure of the underlying forecasts, assumptions and sensitivities. This criticism could be met by making the disclosures, but there may then be issues as to their volume and complexity.

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