IAS 36 Value in Use vs Fair Value Using Income Approach

[JRSB]

Taking the impairment test using higher of VIU and FVLCTS.

IFRS 13 includes the 'income approach' which is based on discounted future cash flows.

what is the difference between a fair value calculated using the income approach, and value in use itself?

To give the specific example, I am looking at the annual report of a pharmaceutical company who is testing it's intangible assets/brands for impairment.

[Ketan Marwah]

Hi,

The VIU methodology is more prescriptive and is intended to test the CGU as it exists today; it therefore includes only expenditure that would maintain the existing capacity of the non-current asset. FVLCTS is based on a market participant approach and can be estimated using assumptions that a market participant might make about enhancing the performance of an asset. Any cash outflows related to enhancing performance and cash inflows from increased sales or decreased costs are excluded from a VIU calculation. The IASB has tentatively decided to permit the inclusion of cash flows resulting from a future restructuring or enhancement in the value in use calculation in upcoming IAS 36 improvements, to align it with approved budgets and forecasts which is used for cash flow projections.

Additionally, selection of a discount rate is a key judgement. The discount rate for a VIU calculation should be a pre-tax rate that reflects the specific risks of the asset or CGU. However, rates observed in the market are typically post-tax, so in practice, value in use is often calculated with post-tax cash flows and a post-tax discount rate. A FVLCTS calculation would use a post-tax rate.

[Marek Muc]

Thanks Ketan for this detailed explanation. I think we can summarise this as follows: ViU is an entity-specific measure, whereas FV is a market-based measure, even if determined using the income approach.

Is this a public entity that you're looking at, JRSB? It would be useful to know more about the assumptions used in their FV measurement to better understand their intentions. Can you share the disclosures they made?

PS. Please please don't use generic topic titles like 'IAS 36'!

[JRSB]

Yes it's Haleon PLC.
So based on the above, it sounds as though the income approach will in almost all cases allow a wider interpretation and therefore a higher value, which seems to make the VIU redundant to some extent.

"The Group tests all its indefinite life brands for impairment by applying a fair value less costs to sell model using post-tax cash flow
forecasts over a period of 10 years with a terminal value calculation. All brands were tested for impairment using brand specific
assumptions which included a discount rate equal to the Group’s post-tax WACC of 7.0% (6.0% for 2021 and 2020) adjusted where
appropriate for country and currency risks. This valuation methodology uses significant inputs which are not based on observable
market data, and therefore this valuation technique is classified as level 3 of the fair value hierarchy. In addition to the discount rate,
the main assumptions include future sales price and volume growth, product contribution and the future expenditure required to
maintain the product’s marketability and registration in the relevant jurisdictions. These assumptions are based on past experience
and are reviewed as part of management’s budgeting and strategic planning cycle. The terminal growth rates applied of between zero
and 3% (2021: -3% and 3%) are management’s estimates which align with those of market participants’ estimate of future long-term
average growth rates for the relevant markets. The Group has stress tested the future cash flows for the potential impact of climate
change and concluded that there is sufficient headroom."

[Marek Muc]

There might some manoeuvring involved given that they switched from FV to ViU for CGUs:

If they test brands separately from other CGU assets, they should include brand royalty payments in the ViU cash flow assumptions. It's unclear if this was done, as their disclosures are quite skimp and lack any cash flow assumptions.

PS. I've edited the topic title

[JRSB]

Yes and I think in this case there's insufficient explanation for the reason for the change.
But a bit clearer now.