Projected cash flow for calculating value in use

Question

With reference to estimated cash flow for calculating Value in use, I faced a projected cash flow (i just extract one year for consideration) as follows:
Entity operation: manufacture clothes.
                                                                            FY 2014 (mil)
Revenue:                             (1)                             700
Cost of good sold:               (2)                             400
Gross margin:                     (3)                             300
Change in working capital: (4)                                 0
Cost to maintain PP&E:      (5)                               50
Depreciation and amortisation: (6)                       100
*** cash flow:         (3)-(4)+(5)                              350

What is wrong with above estimated cash flow?

I wonder whether or not the cash flow should include salary of administrative employees, advertising expense, stationary expense and other outside service other than maintenance expense (these expense is out of COGS, just included in G&A expense and selling expense)?

Answer 1

You seem to be calculating value in use for a cash generating unit. Value in use calculations should include overheads that are directly attributed or can be allocated on a reasonable and consistent basis [IAS 36.39(b)]. Therefore I think you should allocate the said expenses also on a reasonable basis. However you should exclude borrowing costs, income tax receipts or payments and capital expenditures that improve or enhance the asset’s performance.

Comments

Thank u very much. It is quite useful for me.

Answer 2

When measuring VIU, an entity’s cash flow projections:
•Must be based on reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the remaining useful life of the asset

• Must be based on the most recent financial budgets/forecasts approved by management — without including cash inflows or outflows from future restructurings to which the entity is not yet committed

• Should exclude borrowing costs, income tax receipts or payments and capital expenditures that improve or enhance the asset’s performance

• Should include overheads that are directly attributed or can be allocated on a reasonable and consistent basis and the amount of transaction costs if disposal is expected at the end of the asset’s useful life

• For periods beyond the periods covered by the most recent budgets/forecasts should be based on extrapolations using a steady or declining growth rate unless an increasing rate can be justified

Reference:
http://***.ey.***/Publication/vwLUAssets/Impairment_accounting_IAS_36_0810/$FILE/Impairment%20accounting%20IAS%2036%200810.pdf

Comments

Thank u very much.