Value in use is a current value measurement basis used in financial reporting that measures the present value of the estimated future cash flows expected to be generated by an asset or a cash-generating unit. According to the conceptual framework for financial reporting, value in use reflects the present value of the expected future cash inflows or savings that an asset or a cash-generating unit is expected to generate in the ordinary course of business.

The value in use calculation typically involves estimating future cash flows, discounting them to present value using an appropriate discount rate, and subtracting any disposal costs or other costs that would be incurred if the asset were sold. The formula for calculating the value in use of an asset or cash-generating unit is as follows:

Value in use = Present value of expected future cash flows - Disposal costs

To use value in use as a measurement basis, an entity must be able to reliably estimate the expected future cash flows associated with the asset or cash-generating unit, and must be able to determine an appropriate discount rate to use in the calculation. The estimated future cash flows should also be adjusted for any risks or uncertainties that may impact the expected cash flows.

Overall, value in use is an important measurement basis in financial reporting, as it allows entities to measure the elements of their financial statements at their current market value, based on the expected future cash flows that the asset or cash-generating unit is expected to generate. By using value in use, entities can provide users with relevant and reliable information about their financial position and performance, which can help users make informed economic decisions.

Here is an example of a value in use measurement:

Example:

Let's say a company has a patent that it purchased for $50,000. The patent has a remaining useful life of 5 years and is expected to generate cash inflows of $12,000 per year over that time period. The company estimates that the appropriate discount rate to use for this calculation is 8%.

To measure the patent using the value in use basis, the company would calculate the present value of the expected future cash flows as follows:

Present value of expected future cash flows = ($12,000 / (1 + 8%)^1) + ($12,000 / (1 + 8%)^2) + ($12,000 / (1 + 8%)^3) + ($12,000 / (1 + 8%)^4) + ($12,000 / (1 + 8%)^5)

Present value of expected future cash flows = $49,657

To measure the patent using the value in use basis, the company would record the following:

Patent (asset) $49,657

Impairment loss (expense) $0

By recording this journal entry, the company is measuring the patent at its present value of expected future cash flows, or value in use. Since the carrying amount of the patent is less than its value in use, no impairment loss is recognized.

In this example, the present value of the expected future cash flows is $49,657, which is greater than the carrying amount of the patent of $50,000. Therefore, no impairment loss is recognized.

Here is the calculation presented in a tabular format:

To calculate the present value of the expected future cash flows, the cash flows for each year are discounted to present value using the discount factor (which is calculated using the discount rate of 10%). The present value of the expected future cash flows is then calculated by summing the present values for each year.

In this example, the present value of the expected future cash flows is $19,060. This is the value in use of the machine, which is then compared to its carrying amount to determine if an impairment loss needs to be recognized.