Impairment - Discount rates for Value in Use

DDan3y ago

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, Dan

stephenwidbergTutor3y ago#1

Accounting 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? :)

DDan3y ago#2

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, Dan

stephenwidbergTutor3y ago#3

Discount 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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