Value in use under AS 28 is not simply management's forecast of future profit. It is a present-value measure of the future cash flows expected from continuing to use an asset and from disposing of it at the end of its useful life. The calculation matters because AS 28 defines recoverable amount as the higher of net selling price and value in use; if carrying amount is above recoverable amount, an impairment loss arises.
This guide is for entities applying Indian Accounting Standards in the AS framework, not Ind AS. The current ICAI AS 28 full text is the primary reference. ICAI has also issued a specific Technical Guide on estimation of future cash flows and discount rates for AS 28, reflecting how important the assumptions behind value in use are in practice.
Where value in use fits into the impairment test
AS 28 requires an impairment-indicator assessment at each balance sheet date. Indicators include abnormal market-value declines, adverse technological or market changes, physical damage or obsolescence, and internal evidence of worse-than-expected economic performance. When an indicator exists, recoverable amount is estimated. It is the higher of net selling price and value in use; if one measure already exceeds carrying amount, the other need not be calculated.
Step 1: identify the right asset or cash-generating unit
Before building a discounted cash-flow model, decide what is actually being tested. If an individual asset generates cash inflows that are largely independent, its recoverable amount can be tested directly. If it does not, AS 28 requires testing at the level of the relevant cash-generating unit, or CGU.
A CGU is the smallest identifiable group of assets generating cash inflows from continuing use that are largely independent of other cash inflows. This prevents an asset from being valued using cash flows it cannot independently generate.
Step 2: start with supportable operating cash flows
Management should use reasonable and supportable assumptions representing its best estimate of economic conditions, giving greater weight to external evidence. Projections should be based on the most recent financial budgets or forecasts approved by management.
The budget-based projection period should normally cover a maximum of five years unless a longer period can be justified. Cash flows beyond that period are extrapolated using a steady or declining growth rate unless an increasing rate is justified. The long-term growth rate should not exceed the long-term average for the relevant products, industry, country or market unless a higher rate can be supported.
Step 3: include only cash flows permitted by AS 28
A value-in-use model should reflect the asset in its current condition. That means the model needs discipline about what enters the forecast.
- Include cash inflows from continuing use of the asset or CGU.
- Include cash outflows necessary to generate those inflows, including directly attributable or reasonably allocated overheads.
- Include expenditure needed to maintain or sustain the asset at its originally assessed standard of performance.
- Include the estimated net cash flow from disposal at the end of useful life.
- Do not include benefits or costs from a future restructuring to which the enterprise is not yet committed.
- Do not include future capital expenditure that would improve or enhance performance beyond the asset's current assessed standard, or the benefits expected from that enhancement.
- Do not include financing cash flows or income-tax receipts and payments.
A commercially realistic forecast can still be unsuitable for AS 28 if it assumes an uncommitted restructuring, future expansion or cash flows outside the tested unit.
Step 4: choose a consistent pre-tax discount rate
AS 28 requires a pre-tax discount rate reflecting current market assessments of the time value of money and the risks specific to the asset. The rate should not include risks already reflected in the cash-flow estimates; otherwise the same risk is counted twice.
Where an asset-specific market rate is unavailable, possible market-based starting points include a comparable weighted average cost of capital, the enterprise's incremental borrowing rate or other market borrowing rates, adjusted for relevant risks. The key is consistency between cash flows and the rate, not selecting the rate that produces a preferred result.
Worked example: value in use and impairment
Assume a production asset has a carrying amount of ₹105 lakh and three years of remaining useful life. Management's supportable pre-tax net operating cash-flow estimates are ₹35 lakh, ₹38 lakh and ₹40 lakh for Years 1, 2 and 3. Expected net disposal proceeds at the end of Year 3 are ₹5 lakh. Assume a supportable pre-tax discount rate of 12%.
The value-in-use calculation is approximately: ₹35 lakh divided by 1.12, plus ₹38 lakh divided by 1.12 squared, plus ₹45 lakh divided by 1.12 cubed. The resulting present value is about ₹93.57 lakh.
Now assume the asset's net selling price is ₹90 lakh. Recoverable amount is the higher of ₹90 lakh and ₹93.57 lakh, so recoverable amount is ₹93.57 lakh. Compared with the ₹105 lakh carrying amount, the illustrative impairment loss is about ₹11.43 lakh.
An impairment loss for an individual asset is generally recognised immediately in profit and loss unless the asset is carried at a revalued amount. Future depreciation or amortisation is then adjusted using the revised carrying amount.
Special point for eligible SMCs and SMEs
The current AS 28 text contains a relaxation for specified Small and Medium-sized Companies and Level II or Level III non-company entities: eligible entities may use a reasonable estimate of value in use instead of the present-value technique. This is an eligibility-based relaxation, not a general shortcut. Confirm current classification before using it and document the estimate and assumptions.
Value-in-use working-paper checklist
- Record the impairment indicator that triggered the test.
- Confirm whether the test is for an individual asset or the correct CGU.
- Reconcile carrying amount to the relevant ledger and use the latest management-approved budgets.
- Document external evidence supporting key assumptions.
- Separate maintenance expenditure from future enhancement expenditure.
- Exclude uncommitted restructuring benefits, financing cash flows and income-tax cash flows.
- Document terminal disposal cash flows and support the pre-tax discount rate without double-counting risk.
- Compare value in use with net selling price; use the higher amount as recoverable amount.
- If impairment is recognised, update future depreciation or amortisation and retain the calculation and approvals.
Common mistakes
- Using accounting profit or EBITDA as if it were value in use.
- Forecasting growth beyond five years without explaining the extrapolation basis.
- Adding benefits from a future expansion or restructuring that is not yet committed.
- Including financing and tax cash flows while also using a pre-tax discount framework.
- Testing an asset alone when it does not generate independent cash inflows.
- Using a discount rate chosen to avoid impairment rather than one supported by market evidence and asset-specific risk.
- Failing to revisit useful life, depreciation method or residual value when impairment indicators reveal changed economics.
Practical takeaway
A defensible AS 28 value-in-use model starts with the correct asset or CGU, uses approved and supportable operating cash flows, excludes future enhancements and uncommitted restructurings, applies a consistent pre-tax discount rate and clearly bridges the result to recoverable amount and the impairment entry. The spreadsheet is only the last step; the real quality of the calculation comes from the evidence behind its assumptions.
