Saturday Brain Storming Thought (147) 08/01/2022


Value in use is the net present value (NPV) of a cash flow or other benefits that an asset generates for a specific owner under a specific use

It is generally estimated at a use that is less than highest and best use, and therefore it is generally lower than market value

Example of value in use

A land that is located at a place that is in the path of growth for a major project and is used as a small farm will have the value in use less than market value

Calculation of value in use

1) the future cash inflows and outflows from continuing use of the asset are estimated

2) the cash inflow from the ultimate disposal of the asset is estimated

3) these cash inflows and outflows are then discounted using an appropriate discount rate

Value in use is discounted to reflect the underlying risk and the time value of the money concept

Value in use in economics

It refers to the tangible features of a commodity (a readable object) which can satisfy some human requirement, want or need, or which serves a useful purpose

Depreciation in value in use

Depreciation and amortization are not included, because they are not cash items

Our aim is to arrive at pre-tax cash flows

Value in use is calculated on a pre-tax basis to avoid complications related to tax losses carried forward, deferred taxation etc

Value in use under IAS 36

Under IAS 36, the carrying amount of assets in the statement of financial position should not be higher than the economic benefits expected to be derived from them

The amount of economic benefits is the recoverable amount as per IAS 36 terminology

Value in Use = Fair Value less cost of disposal

If the carrying amount is higher than the recoverable amount, the asset is impaired, ie entities need to decrease the value of the asset through recognition of an impairment loss

Value in use for money

Inflation is caused when the money supply rises faster than the supply of other goods and services
Money has value because people believe that they will be able to exchange this money for goods and services in future

ways of Use of money

1) we can use it to live

2) we can give it

3) we can repay debt

4) we can pay taxes

5) we can save/grow it

History about value in use

The concept of value in use first appeared in February 1987

There were many people who favored it

However, value in use appraisal is not suitable when a general use property has been vacant and is for sale in the open market or for financing purposes

Criteria reviewed for value in use appraisal

1) is the property fulfilling an economic demand?

2) does the property have a remaining useful life?

3) is there responsible ownership?

4) would a diversion of the property to an alternate use be economically feasible?

5) has consideration been given to the property’s functional utility?

6) are the net earnings of the business sufficient to show a fair return on the value of the tangible assets?

Approaches to value undervalue in use

Generally, the Cost Approach is most appropriable for a value in use appraisal

Depreciation estimation can vary depending on the value definition used

The sales comparison approach is a primary valuation method for market value in exchange

The satisfaction which one obtains from the use of a commodity is known as the value in use

Water has immense use-value because it quenches thirst and without it daily life is just impossible

The quality of water is the value in use of water

Advantages of value in use concept

1) incorporates the time value of money

2) simple way to determine if a project delivers value

3) considers a company’s cost of capital

4) accounts for the inherent uncertainty of projections by most heavily discounting far future estimates

Disadvantages of value in use concept

1) accuracy depends on the quality of inputs

2) not useful for comparing projects of different sizes, as the largest projects typically generate the highest returns

3) may omit hidden costs such as opportunity costs and organizational costs

4) purely quantitative in nature and does not consider qualitative factors

Opportunity cost

Opportunity cost refers to what you miss out on by going with one option over another comparable option

Opportunity cost = the return from the unchosen option – the return from your chosen option

Compiled by:-

Avinash Kulkarni
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer

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