STATEMENT OF FINANCIAL POSITION

AN X-RAY OF SOME CRITICAL COMPONENTS OF FINANCIAL STATEMENT

 TRAINING CONTENT
1 INTRODUCTION (CAMA 2020) 12 FINANCIAL INSTRUMENTS IFRS 7, IFRS 9.

2 INTRODUCTION (IAS 1) IMPAIRMENT IAS 36

13
3 STAGES TO PREPARATION OF SOFP
14 PREPAYMENTS
ILLUSTRATION ON STATEMENT OF
4 FINANCIAL POSITION
15 ACCRUALS
5 TRIAL BALANCE
16 BORROWING COST IAS 23
6 STATEMENT OF PROFIT OR LOSS

7 STATEMENT OF FINANCIAL POSTION 17 INVESTMENT IN ASSOCIATE IAS 28

8 A NON-CURRENT ASSET SCHEDULE 18 INTANGIBLE ASSETS IAS 38

9 GRAPHICAL REPRESNTATION OF SOFP

10 INVENTORIES IAS 2

11 PROVISIONS, CONTIGENT LIABILITIES & CONTIGENT ASSETS IAS 37

INTRODUCTION(CAMA 2020)
According to section 377(1-3) in the case of every company, the directors shall, in respect of each year
of the company, prepare financial statements. The financial statements required shall include;
Public companies Private companies
Statement of Accounting Policies Notes to the Accounts
Statement of Financial Position Statement of Financial Position
Statement of Profit or Loss and other Statement of Profit or Loss and
comprehensive income Other Comprehensive income
Statement of Cash flow Auditors Report
Statement of Changes in Equity Directors Report
Notes to The Accounts Five Year Financial Summary
Auditors Report
Directors Report
Five Year Financial Summary
3
Value Added Statement
SUNDAY OMUJUYIGBE FCA, FCTI, MSc. EDWARD ONYEBUCHI ACA. www.sundayomojuyigbe.com phone: 08035747457, 07058653716, 09161702331.
 INTRODUCTION (IAS 1)
STATEMENT OF ASSETS, EQUITY AND
FINANCIAL LIABILITY
POSITION

INCOME
STATEMENT INCOME AND EXPENSES

COMPONENTS OF
FINANCIAL STATEMENT OF CHANGES IN EQUITY OR
CHANGES IN CHANGES OTHER THAN
STATEMENTS THOSE WITH EQUITY
EQUITY
HOLDERS

CASH FLOW CASH INFLOWS AND

OUTFLOWS FROM OPERATING,
STATEMENT
FINANCING AND INVESTING
ACTIVITIES.

NOTES ON THE SIGNIFICANT ACCOUNTING

ACCOUNTS POLICIES AND EXPLAINATORY
NOTES.
4

SUNDAY OMUJUYIGBE FCA, FCTI, MSc. EDWARD ONYEBUCHI ACA. www.sundayomojuyigbe.com phone: 08035747457, 07058653716, 09161702331.
STAGES TO PREPARATION OF STATEMENT OF FINANCIAL
POSITION

TRANSACTION PREPARATION OF
GENERATION STATEMENT OF
OF SOURCE FINANCIAL POSITION
DOCUMENT

PREPARATION
JOURNAL OF INCOME
ENTRY STATEMENT

BOOKS OF
LEDGER EXTRACTION OF
ORIGINAL
POSTING TRIAL BALANCE
ENTRY 5

SUNDAY OMUJUYIGBE FCA, FCTI, MSc. EDWARD ONYEBUCHI ACA. www.sundayomojuyigbe.com phone: 08035747457, 07058653716, 09161702331.
 ACCOUNTING CONCEPTS AND CONVENTION

In preparation of financial statements, whether for the investing public or management use, the
essential objective has to be that the accounts fairly reflect the true "substance" of the business
and the results of its operation. The theory of accounting has, therefore, developed the concept
of a "true and fair view". The true and fair view is applied in ensuring and assessing whether
accounts do indeed portray accurately the business' activities.

To support the application of the "true and fair view", accounting has adopted certain concepts
and conventions which help to ensure that accounting information is presented accurately and
consistently. Accounting concepts are therefore the body of rules and regulations, principles
and practices that form the bedrock for the preparation and presentation of financial
statements.
 
 DOUBLE ENTRY PRINCIPLE
The double entry principle was formulated by Luca Pacioli of Italy in 1494. Double entry is a
system of bookkeeping that is one of the most important foundational concepts in accounting. It
means that for every debit entry into an account, there most be a corresponding credit entry into
a different account.

The purpose is to ensure that a company’s accounts remain balanced at every posting and can be
used to depict an accurate picture of the company’s current financial position to both the
management and external stakeholders such as potential investors, current shareholders,
suppliers, or the government. Debits are typically located on the left side of a ledger, while
credits are located on the right side.

Particular Debit Credit

1. PERSONAL ACCOUNT: Dr. Receiver.
Asset xx Cr. Giver.
2. NOMINAL ACCOUNT: Dr. Expenses.
Liability xx Cr. Income.
Income xx 3. Real Account(assets):Dr. Increase.
Cr. Decrease.
Expenses xx
SUNDAY OMOJUYIGBE & CO.

PARTICULARS DR CR
  N'000 N'000
Capital   50,000
Cash 10,500  
Bank 25,000  
Account Payable (Dauda)   5,000
Sales   35,000
Office Furniture 3,500  
Salaries 6,000  
Purchases 25,000  
Building 10,000  
Vehicle 10,000  
TOTAL 90,000 90,000
 SUNDAY OMOJUYIGBE & CO.
STATEMENT OF PROFIT OR LOSS
FOR THE PERIOD ENDED 31ST DEC. XXXX .

NOTE N'000
SALES 1 35,000

COST OF SALES 2 (25,000)

GROSS PROFIT 10,000

ADMINSTRATIVE EXPENSES3 (6,000)

PROFIT FOR THE YEAR 4 4,000

1. SALES REVENUE N'000 3. ADMIN. COST N'000

Cash sale 35,000 Salaries 6,000
Credit Sales -
Total sales/revenue 35,000

2.COST OF SALE N'000 4. PROFIT FOR THE YEAR. N'000

Purchases 25,000 Net Profit 4,000

Note: The profit for the year is shown in the statement of financial position
as retainned earnings and added to the capital to increase the capital.
 SUNDAY OMOJUYIGBE & CO. SUNDAY OMOJUYIGBE & CO.
STATEMENT OF FINANCIAL POSITION AS AT 31ST DEC. XXXX . STATEMENT OF FINANCIAL POSITION AS AT 31ST DEC. XXXX.
NON CURRENT ASSET N'000
NON CURRENT ASSET NOTES N'000
BUILDING 10,000
VEHICLES 10,000
FURNITURE & FITTINGS 3,500 PROPERTY, PLANT & EQUIPMENT 5 23,500
TOTAL NON CURRENT ASSETS 23,500 TOTAL NON CURRENT ASSETS 23,500

CURRENT ASSET CURRENT ASSET

BANK 25,000
CASH & CASH EQUIVALENT 6 35,500
CASH 10,500
TOTAL CURRENT ASSETS 35,500
TOTAL CURRENT ASSETS 35,500
TOTAL ASSETS 59,000 TOTAL ASSETS 59,000

CAPITAL 50,000 CAPITAL 50,000

RETAINED EARNINGS 4,000
RETAINED EARNINGS 4,000
54,000
CURRENT LIABILITY
ACCOUNT PAYABLES 5,000 CURRENT LIABILITY
ACCOUNT PAYABLES 5,000

TOTAL CAPITAL & LIABILITY 59,000

TOTAL CAPITAL & LIABILITY 59,000

5. PROPERTY, PLANT &

EQUIPMENT(PPE) N'000 6. CASH & CASH EQUIVALENT N'000
BUILDING 10,000 BANK 25,000
VEHICLES 10,000 CASH 10,500
FURNITURE & FITTINGS 3,500 35,500
23,500
 A NON CURRENT ASSET SCHEDULE

DEPRECIATION SCHEDULE- AS AT 31/12/2018

USEFUL NO. OF USED NET BOOK
DESCRIPTION UNIT COST TOTAL COST DATE LIFE(MTHS) MTHS DEP/MTH ACC. DEPRN VALUE
F&F 5 3,500,000 17,500,000 01/01/2017 60 24 291,667 7,000,000 10,500,000
MV 2 5,000,000 10,000,000 03/01/2017 60 22 166,667 3,666,667 6,333,333
PLANT 1 6,000,000 6,000,000 06/01/2018 72 7 83,333 583,333 5,416,667
BUILDING 1 10,000,000 10,000,000 02/01/2017 240 23 41,667 958,333 9,041,667
PROPERTY, PLANTS & EQUIPMENT(PPE)- IAS 16
PPE: Tangible assets that are held for use in production or supply of goods and services, for rental to others, or for
administrative purposes and are expected to be used during more than one period.
COST: The amount paid or fair value of other consideration given to acquire or construct an asset.
USEFUL LIFE: The period over which an asset is expected to be utilized or the number of production units expected to be
obtained from the use of an asset.
DEPRECIATION: This is the systematic allocation of the depreciable amount of an assets over its expected useful life.
FAIR VALUE: This is the amount for which an asset can be exchanged between knowledgeable parties in an arm’s length
transaction.
PROPERTY, PLANT & EQUIPMENT AS AT 31/12/2020
 
25% 25% 15% 25%
Motor Furniture & Office
Building Vehicles Fittings Equipment Total
COST: N N N N N
Historical Cost 150,000,000 20,000,000 8,000,000 13,000,000 191,000,000
Additions 10,000,000 5,000,000 1,200,000 3,000,000 19,200,000
Disposal 20,000,000 2,000,000 500,000 2,500,000 25,000,000
At 31/12/2021 140,000,000 23,000,000 8,700,000 13,500,000 185,200,000

DEPRECIATION:
Depreciation b/fwd 37,500,000 5,000,000 2,000,000 3,250,000 47,750,000
Charge for the year 35,000,000 5,750,000 1,305,000 3,375,000 45,430,000
Disposal 5,000,000 500,000 75,000 625,000 6,200,000
At 31/12/2021 67,500,000 10,250,000 3,230,000 6,000,000 86,980,000

NET BOOK VALUES: 31/12/2020 72,500,000 12,750,000 5,470,000 7,500,000 98,220,000

 INVENTORY (IAS 2)
 International Accounting Standard (IAS 2) provides guidelines for the accounting treatment of inventories. The main issue with
respect to accounting for inventory is the amount of cost to be recognized as an asset. In addition, the standard provides
guidance for the determination of the cost, and subsequent recognition of expense including write-down of inventory to its net
realizable value. The standard also provides guidance on the cost flow assumptions (cost formulas) that are to be used in
assigning cost to inventories.
 MEASUREMENT OF INVENTORY
 The standard states that inventories should be measured at “lower of cost and net realizable value”. Inventory are sold at higher of the
purchase cost, therefore it is normally valued at cost. In extreme cases, the net realizable value becomes lower than the cost. This
arises in the following circumstances;
 Where the inventory is damaged, obsolete, and where market value has drastically reduced.
 TYPES OF INVENTORY: (1) Work in progress- WIP (2) Raw materials (3) finished goods and services.
EXAMPLE ON INVENTORY VALUATION

DESCRIPT TOTAL
S/N ION UNIT COST(N) COST(N) NRV/UNIT TOTAL NRV(N) VALUE(N)
1WATCH 12 2,500 30,000 2,300 27,600 27,600
2T-SHIRT 15 5,000 75,000 5,100 76,500 75,000
3TROUSER 10 4,500 45,000 4,350 43,500 43,500
4SHOE 5 3,000 15,000 3,330 16,650 15,000
5SHORT 14 2,000 28,000 1,950 27,300 27,300
  TOTAL VALUE OF INVENTORY 193,000   191,550 188,400
 PREPAYMENTS
 Prepayments is an accounting term for payment for services before the due date and before such services have been rendered to
the company. It is a type of current asset on the SOFP that results from a company making advance payment for goods and
services to be rendered in the future. Prepaid expenses are initially recorded as assets, but their value is expensed over time
through the income statement. Unlike conventional expenses, the business will receive something of value from the prepaid
expense over the course of several accounting period.

Prepayments Assets
Expenses
(Payment in Advance) (Recognized as current assets)

Understanding Prepaid Expenses: Companies make prepayments for goods or services such as office rent
equipment or insurance coverage that provide continual benefits over time. Goods or services of this
nature cannot be expensed immediately because the expense would not line up with the benefit incurred
over time from using the asset.
Journal entries that recognize expenses related to previously recorded prepayments are called adjusting
entries. They do not record new business transactions, but simply adjust previously recorded
transactions. Adjusting entries for prepaid expenses are necessary to ensure that expenses are recognized
in the period in which they are incurred.
A prepayment is recorded as an asset by a buyer, and as a liability by a seller. These items are usually
stated as current assets and current liabilities, respectively, in the SOFP of each party, since they are
generally resolved within one year.
 ACCRUALS
Accrual or Accrued expense, is a means of recording an expense that was incurred in one accounting period but not paid until a
future accounting period. Accruals differ from Accounts Payable transactions in that an invoice is usually not yet received and
entered into the system before the year end. It is also seen as an accounting method in which revenue are recorded when earned and
not when received . Expenses are recorded as they are incurred and not necessarily when cash is paid out.
 Recording an accrual ensures that the transaction is recognized in the accounting period when it was incurred, rather than paid.
This is a requirement of GAAP-based accounting, and provides a more accurate and up-to-date view of the company’s financial
position than the cash- basis accounting method, in which expenses are recorded when paid.

Accruals
concept

Current Current Current

Expenditure Income
liability Assets liability

Yet to be Received in
Accrued Prepaid received advance
Accruals concept: The accruals concept is identified as an important accounting concept (IAS 1 Presentation of Financial Statements).
The concept states that income and expenses should be matched together and dealt with in the income statement for the period to
which they relate, regardless of the period in which the cash was actually received or paid. Therefore all of the expenses involved in
making the sales for a period should be matched with the sales income and dealt with in the period in which the sales themselves are
accounted for. The accruals basis of accounting means that to calculate the profit for the period, we must include all the income and
expenditure relating to the period, whether or not the cash has been received or paid or an invoice received
PROVISIONS, CONTINGENT LIABILITIES ASSETS- IAS 37

IAS 37 outlines the accounting for provisions (liabilities of uncertain timing or amount), together with contingent
assets (possible assets) and contingent liabilities (possible obligations and present obligations that are not
probable or not reliably measurable). Provisions are measured at the best estimate (including risks and
uncertainties) of the expenditure required to settle the present obligation, and reflects the present value of
expenditures required to settle the obligation where the time value of money is material.
The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are applied to
provisions, contingent liabilities and assets and that sufficient information is disclosed in the notes to the financial
statements to enable users to understand their nature, timing and amount. The key principle established by the
Standard is that a provision should be recognized only when there is a liability. The Standard thus aims to ensure
that only genuine obligations are dealt with in the financial statements – planned future expenditure.
An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an entity
having no realistic alternative but to settle the obligation. A constructive obligation arises if past practice creates a
valid expectation on the part of a third party, for example, a retail store that has a long-standing policy of allowing
customers to return merchandise within, say, a 30-day period.
Measurement of provisions: The amount recognized as a provision should be the best estimate of the expenditure
required to settle the present obligation at the SOFP date. This means: Provisions for one-off events (restructuring,
environmental clean-up, settlement of a lawsuit) are measured at the most likely amount. Provisions for large
populations of events (warranties, customer refunds) are measured at a probability-weighted expected value. Both
measurements are at discounted present value using a pre-tax discount rate that reflects the current market
assessments of the time value of money and the risks specific to the liability.

 BORROWING COST(IAS 23)
IAS 23 prescribes the criteria for determining whether borrowing cost can be capitalized (added) as part of the cost of acquiring,
constructing, or production of a qualifying asset. Borrowing cost includes interest and other cost incurred by an entity in relation to
borrowing of funds, while a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended
use or sale. Assets that are ready for use or sale when they are acquired are NOT qualifying assets.
Capitalization in the context of borrowing costs simply means adding to or being included to. For instance if we add the
cost of installing a newly purchased state of the art equipment to the cost of buying and bring the asset to site, it simply
means we have capitalized the installation cost.
WHAT ARE BORROWING COSTS:
Borrowing cost are not interest on short term loans or overdrafts, borrowing cost as envisaged by the standard is borrowing cost on
amortization relating to long term borrowings, exchange difference arising from foreign currency borrowings to the extent they are
regarded as an adjustment to interest cost and finance charges in respect of finance lease.
BORROWINGS ELIGIBLE FOR CAPITALIZATION; When borrowings are taken specifically to acquire, construct, produce an
asset then such borrowing cost ( to the extent that the funds where used) should be capitalized.
COMMENCEMENT & CESSATION OF CAPITALIZATION; Borrowing cost should commence when expenditures for the assets
are being incurred, borrowing cost are being incurred and the activities to prepare the assets for its intended use or sale are in
progress, while capitalization should cease when all activities necessary to prepare the assets for its intended use or sale are have
been completed.
INTEREST RATE TO BE USED
Only borrowing costs that are actually incurred less any investment income from temporarily investing the fund before eventually
using them may be capitalized.
  
 FINANCIAL INSTRUMENTS (IAS 32, IAS 39)

IAS 32 defines financial instruments as a contract that gives rise to financial asset to one company, and financial
liability or equity to the other company. Financial assets are any asset that is cash, equity instrument of another
company, or a contractual right to receive cash, or other financial asset from another company. A financial liability
are any liability that is a contractual obligation to pay cash, or other financial instrument to other companies.
TYPES OF FINANCIAL INSTRUMEMTS

FINANCIAL
INSTRUMENTS

CASH DERIVATIVE FOREIGN EXCHANGE

INSTRUMENTS INSTRUMENTS INSTRUMENTS

Securities, deposits and loans Options, Currency swap etc

Currencies, Bonds and Equity.
The issuer of a financial instrument shall classify the instrument, or its component parts, on initial recognition as financial liability, a
financial asset, or an equity instrument in accordance with the substance of the contractual arrangement and the definitions of a
financial liability, financial asset and an equity instruments.
According to IAS 39 companies are permitted to designate financial assets and liabilities at fair value through profit or loss if specified
conditions are met.
If an entity reclassifies a financial asset such that the reclassification changes the measurement of the asset from one that is measured
at cost to one that is measured at fair value, the company is required to disclose the amount reclassified and the reason for the
reclassification
 INTANGIBLE ASSETS (IAS 38)
 International Accounting Standard (IAS 38) prescribe the recognition and measurement criteria for intangible assets that are not
covered by other standards. An asset is defined as a resource controlled by the company as a result of past events and from which
future economic benefits are expected to flow, while an Intangible asset is an identifiable, non-monetary asset without physical
substance.
 The cost of generating an intangible asset internally is often difficult to distinguish from the cost of maintaining or enhancing the
entity’s operations or goodwill. For this reason, internally generated brands, mastheads, publishing titles, customer lists and
similar items are not recognized as intangible assets. The costs of generating other internally generated intangible assets are
classified into whether they arise in a research phase or a development phase. Research expenditure is recognized as an expense.
Development expenditure that meets specified criteria is recognized as the cost of an intangible asset.
 RECOGNITION AND MEASUREMENT: Intangible assets are measured initially at cost. After initial recognition, an entity
usually measures an intangible asset at cost less accumulated amortization. It may choose to measure the asset at fair value in
rare cases when fair value can be determined by reference to an active market, where the cost of the asset can be reliably
measured.
Intangibles assets can be acquired through: separate purchase, as part of a business combination, by a government grant, by
exchange of assets, by self-creation (internal generation).
 RETIREMENTS AND DISPOSALS: Intangible assets shall be derecognized on disposal or when no future economic benefits are
expected to be derived from their use or disposal. Any gain or loss on de-recognition amounts to the difference between the net
disposal proceeds, if any, less the carrying amount of the asset. The gain or loss is to be recognized in the income statement.
 TYPES OF INTANGIBLE ASSETS: Goodwill, Franchise Agreement, Patent Right, Copy Rights, Trade marks, Licenses,
Broadcast Rights, Government Grants, Non Competition Agreements, Trade Secrets and know-How, Research and
Developments, Internet Domain Names, websites, Service Contracts and Lease, Customer List and Relationship.
 INVESTMENT IN ASSOCIATE (IAS 28)
 According to International Accounting Standard(IAS 28) an associate is a company over which the investor has significant
interest. This means the power to participate in the financial and operating policy decisions of an investee company, but which is
neither a subsidiary nor an interest in a joint venture.
 SIGNIFICANT INTERREST
IAS 28 states that an investor has significant interest if it holds directly or in directly 20% or more of the voting power(equity) of
another company. If it holds lesser than 20%, it means that significant interest does not exist unless it can be clearly shown that
significant influence does not exist. Where it holds 20%-50% of the equity it means that interest exists but not controlling interest.
 ACCOUNTING FOR INVESTMENT IN ASSOCIATE
IAS 28 states that Investment in Associate must be accounted for using the equity method, this is defined as a method of accounting
where the investment is initially recognized at cost and adjusted thereafter for the post acquisition change in the retained
earnings/profits.
INVESTMENT IN ASSOCIATE JOURNAL ENTRY
Acquisition of associate journal entry : The company can make the journal entry for the acquisition of associates by debiting the
investment in associates account and crediting the cash/bank account.
Investment in associates account is an asset account on the SOFP. Likewise, its normal balance is on the debit side of the trial
balance.

INCOME OR LOSS ON INVESTMENT IN ASSOCIATE

At the end of the period, the company can record the income from associates with the journal entry of investment in associates
account on the debit side and the income from investments account on the credit side.
As the investment in associates follows the equity accounting, the company needs to record income from associates that result from
the net income of the investee company as an increase in the investment in associates account on SOFP
 IMPAIRMENT (IAS 36)
 International Accounting Standard (IAS 36) states that if an asset’s carrying value exceeds the amount that could be received through
use or sell, then the asset is said to be impaired. Therefore, impairment can be defined as the permanent loss in value of an asset.
Value-in-use is defined as the discounted present value of the future cash flows expected to arise from the use of an asset.
 Typically, companies should estimate the future cash inflows and outflows from the assets and from its eventual sale and then
discount the future cash flows accordingly.
 According to IAS 36, company’s has to assess at each SOFP date whether there is any indication that an asset is impaired. The
standard sets out the events that might indicate that an asset is impaired. These are External and Internal indicators within the
company.
 EXTERNAL INDICATORS: These includes decline in market value, increases in interest rates, legal and technological changes that
adversely affects the use of the asset.
 INTERNAL INDICATORS: These includes physical damage to an asset, obsolescence, a significant decline in the cash flow generated
by the asset.
 Additionally, even if there is no indication of impairment, these assets should be tested for impairments:
 *An intangible assets that has an indefinite useful life.
 *An intangible asset that is not yet available for use.
 *Goodwill that has been acquired in a business combination should be tested annually.

 RECOGNITION AND MEASUREMENT OF AN IMPAIRMENT LOSS: Where the recoverable amount of an asset is less than its carrying
amount, the carrying amount will be reduced to its recoverable amount. This reduction is the impairment loss. The impairment loss should
be recognized in the profit or loss unless the assets is carried at a revalued amount, in which case the impairment loss is treated as a
revaluation loss
MEASUREMENT OF RECOVERABLE AMOUNT.
A company has a machine in its statement of financial position at a carrying
amount of N300,000.
The machine is used to manufacture the company's best-selling product range,
but the entry of a new competitor to the market has severely affected sales.
As a result, the company believes that the future sales of the product over the
next three years will be only 150,000,100,000 and 50,000.The asset will then be
sold for N25,000.
An offer has been received to buy the machine immediately for 240,000,but the
company would have to pay shipping costs of 5,000.The risk-free market rate of
interest is 10%.
Market changes indicate that the asset may be impaired and so the recoverable
amount for the asset must be calculated.

Fair value less costs of disposal N000

Fair value 240,000
Costs of disposal (5,000)
235,000

YEAR CASHFLOW DISC. FACTOR PRESENT VALUE

1 150,000 1/1.1 136,364
2 100,000 1/1.12 82,645
3 150,000+25,000 1/1.13 56,349
275,358
NOTE: DISC. FACTOR: 1/(1+r)n

The recoverable amount is the higher of 235,000 and N275, 358, i.e. 275,358.
The asset must be valued at the lower of carrying value and recoverable
amount.
The asset has a carrying value of 300,000, which is higher than the
recoverable amount from using the asset.
It must therefore be written down to the recoverable amount, and an
impairment of 24,642 (300,000 - N275, 358) must be recognized.
 VALUE IN USE
This is the present value of future cashflows from using an asset, including its eventual disposal.
CALCULATION OF VALUE IN USE
Value in use is a value that represents the present value of the expected future cash flows from use of the asset,
discounted at a suitable discount rate or cost of capital. Value in use is therefore calculated by:
a. Estimating future cash flows from the use of the asset (including those from ultimate disposal).
b. Discounting them to present value.
Estimates of future cash flows should be based on reasonable and supportable assumptions that represents
management’s best estimate of the economic conditions that will exist over the remaining useful life of the asset.
The discount rate used should be the rate of return that the market would expect from an equally risky investment.

CASH GENERATING UNIT(CGU)

It is not always possible to calculate the recoverable amount of individual assets. Value in use often has to be
calculated for groups of assets, because assets may not generate cash flows in isolation from each other. An assets
that is potentially impaired may be part of a larger group of assets which form a cash-generating unit.
IAS 36 Defines cash generating unit as the smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash flows from other assets or group of assets.