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Hi Stephen,
In regards to “Businesses split Assets into different CGU’s because each CGU has different discount rates”
I know this is related to risk but please can you help me have a deeper understanding of why?
For example, if the Accounting tuition CGU will generate ‘value in use’ of £100k over the next 5 years, discounted down to present value lets say £80k in today’s value. Surely if the Dentist tuition CGU also generates ‘value in use’ of £100k over the next 5 years, then we would use the same discount factor %? (so that it would also be worth £80k in today’s value)
Thank you for your enjoyable lecture on impairment.
Many thanks,
DanAccounting and Dentistry both have expected future cash flows of 100k.
Each will have a different discount rate – e.g. 10% for accounting and 15% for dentistry. (I’ve made these rates up, but they’ll be linked to Betas)
So the present values (Value in use) will be different.
Dentistry will have a lower value in use.
Does that make sense?
🙂
Hi Stephen,
That’s the bit I understand. What I’m struggling with is – why do accounting and dentistry have different discount rates?
Maybe I should have worded my question as – ‘what do discount rates actually represent?’
Thanks,
DanDiscount rate is linked to risk – Beta of sector (think back to FM).
Reminder about Betas:
https://www.icaew.com/library/research-guides/beta-values
I was assuming that dentistry is more risky, which may or may not be true.
🙂
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