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Fair value and value in use (impairment testing)

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)

22 August 2012

Dear Members please advise me on the following:

For the purpose of impairment testing per IAS 36 or under Indian Accounting Standard, we are required to calculate the Fair Value less cost to sell (FVLCTS) and Value in Use (VIU). Assume a case of non listed entity for which there is no active market of buyers and sellers. In such a case, the standard permits to calculate the FVLCTS based on the discounted cash flow model. The same discounted cash flow model is also used for calculation of VIU.

Now, the question is if we use the same discounted cash flow model than why the standard requires to calculate the FVLCTS and VIU. What could be the possible difference (different assumptions) in using same discounted cash flow model for calculating FVLCTS and VIU.

Thanks

Sachin

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4 Replies

CA C.JANANI (partner) (270 Points)
Replied 29 August 2012

IAS 36 allows under fvlcts, as a final option only estimation of what could be the arm's length price assuming it it sold. it does not allow discounted cash flow method under it.(para 27) Only under value in use discount method is used .

swarna (self employed) (55 Points)
Replied 30 August 2012

I agree with C janani.for calculation of value in use,the discount method is used and as per Ind As -36,where there is no active market for an asset,fvlcts is based on the best informtion available to reflect the amount that an entity could obtain at the end of the reporting period from the disposal of the asset in an arms lenght transaction after deducting the cost of disposal and direct incremental cost to bring an asset into condition for its sale.

CA. Mayur (Service) (147 Points)
Replied 31 August 2012

little confuse on question why you have put an example of unlisted entity ? Are you referring to investment in securities of unlisted company and its impairment testing, but in that case the same is not govern by IAS 36.

CA Sachin Rastogi (Audit/IFRS Manager) (338 Points)
Replied 31 August 2012

Dear Members

There can be many practical cases where the impairment testing is required by a group for its subsidiaries. Subsidiaries (assuming they are cash generating units) may or may not be listed on stock exchange.

Each company has its own business model, market share, goodwill, customer base etc. and their value cannot be similar to any other company as there is no ready market available for non-listed entities. Considering the disposal value of assets and liabilities (settlement) may not be a correct way to assess the fair value of the company. Future cash flows, committed business orders, customer base, market share also impacts the fair value of the company.

Therefore you normally find book value of a share comparatively lower than the market value of a listed entity share because of market share, future growth, shareholders expectations etc. In the same manner, the market value of a non-listed entity will normally be higher than its books value.

Now coming back to my question for a non-listed for which there is no ready market to assess the fair value, a discounted cash flow model is appropriate for the purpose for the fair value calculation.

The only problem is both FVLCTS and VIU use discounted cash flow model and this model is based on different assumptions. My view is that there can be different assumptions in arriving at both the values. If anyone has done this than he will be able to share with us the different assumptions used by him in both the models.

Thanks

Sachin