What it means
When running a business, you often own assets like specialised machinery, delivery vans, or software that do not have a ready-made market for a quick second-hand sale. Instead of looking at what someone else might pay you for them, value in use looks inward.
It calculates the net cash flow those assets will generate for your operations over their remaining useful life. You take future earnings and reduce them to today's money using a discount rate to account for time and risk.
This concept matters deeply when your company runs impairment tests. Accounting rules say that if the market value of an asset drops, but its value in use remains high because it drives core sales, you do not necessarily have to write down its worth on your balance sheet.
For non-finance managers, understanding this metric prevents hasty decisions to sell off productive tools just because their external resale price looks low. It shifts the focus from external market fluctuations to internal operational productivity, ensuring you protect the assets that actually keep your revenue engine running day after day.
Imagine an old pair of gardening boots that look battered and worthless at a car boot sale. To a stranger, they have zero market value.
But to you, they keep your feet warm and dry while growing prize-winning vegetables, giving them immense value in use.
In practice
Real-world examples
Example 1
A logistics firm owns a delivery van with low market resale value due to high mileage, but keeps it because its dependable daily routes generate $15,000 in annual profit. The van could be sold for only $4,000, yet over its remaining life it adds far more than that to the business. Selling it would leave a hole in the delivery schedule.
Example 2
A bakery owns a custom dough mixer worth very little on the second-hand market, yet relies on it to produce signature pastries that bring in $30,000 of profit each year. A standard replacement would not match the recipe's texture. The owner therefore values the mixer by the profit it enables, not by its resale price.
Example 3
A small software agency keeps an older server rack because replacing it is costly, and the hardware continues to reliably host client databases that yield $20,000 annually. When the accountant tests for impairment, the future cash flows from those clients support the carrying amount. No write-down is needed.
Think of it
Imagine an old pair of gardening boots that look battered and worthless at a car boot sale. To a stranger, they have zero market value. But to you, they keep your feet warm and dry while growing prize-winning vegetables, giving them immense value in use.
Formula
Calculation
Value in Use = Sum of [Future Net Cash Flow in each year / (1 + Discount Rate)^Year]
Worked example 1. A machine generates $10,000 next year and the discount rate is 10%, so its present value is $10,000 / 1.10 = $9,091.
Worked example 2. The same machine generates $10,000 a year for 3 years, discounted at 10%.
- Year 1: $10,000 / 1.10 = $9,091
- Year 2: $10,000 / 1.21 = $8,264
- Year 3: $10,000 / 1.331 = $7,513
- Value in use = $9,091 + $8,264 + $7,513 = $24,868 (rounded)
Now suppose the machine is carried in the books at $30,000, and its fair value less costs of disposal is only $15,000. The recoverable amount is the higher of the two measures, which is the $24,868 value in use. The impairment loss is therefore $30,000 - $24,868 = $5,132, not the $15,000 that a quick resale price might suggest.Case study
Seen in the real world
This is a fictional, illustrative scenario. Oakwood Manufacturing owned a specialised assembly press used for producing its bestselling furniture line. Due to changing industry trends, the second-hand market for this specific press had crashed, and local scrap dealers offered a mere $5,000. However, the plant manager knew the machine was essential. Oakwood calculated the value in use by forecasting the net cash flows the press would generate over its remaining five years of life.
Based on steady product demand, the machine was projected to bring in $20,000 of net cash annually. Using a discount rate of 8%, the finance team calculated a value in use of approximately $79,850 ($20,000 multiplied by an annuity factor of 3.993). Because this internal figure vastly exceeded the external scrap value of $5,000, Oakwood chose to keep operating the machine. The press was carried in the books at $70,000, and since its value in use of $79,850 was higher, no impairment loss was recorded. This prevented a massive, unnecessary asset write-down on the financial statements and accurately reflected the true operational worth of the equipment to the business.
Watch out
Common mistakes
- Confusing value in use with fair market value or what someone would pay you for the asset.
- Forgetting to adjust future cash flows for inflation or the time value of money.
- Overestimating the remaining useful life of the asset to artificially boost the calculated value.
Questions
People also ask
How often should I calculate value in use?
You typically calculate it only when there is an indicator that an asset might be impaired, such as a sudden drop in sales or a change in market conditions.
Is value in use the same as book value?
No. Book value is what the asset cost originally minus accumulated depreciation, whereas value in use is a forward-looking estimate of future cash generation.
Can value in use apply to an entire factory?
Yes. When individual assets do not generate independent cash flows, accountants group them into a cash-generating unit, which can be an entire facility or business division.