(This article was published on 26 November 2024 and updated on 26 November 2025)
Companies typically use the discounted cash flow (DCF) technique to calculate the recoverable amounts of assets (or cash-generating units (CGUs)). Recoverable amount is the higher of value in use (VIU) and fair value less costs of disposal (FVLCD).
Climate-related risks and opportunities may significantly affect expectations of a company’s future cash flows in many ways – its revenues, operating costs (opex) and capital expenditure (capex) – as shown in the diagram below.
Your questions answered
Concepts and approaches
IAS 36 Impairment of Assets addresses the measurement of VIU and IFRS 13 Fair Value Measurement provides guidance on how to measure fair value. The key differences that may be relevant to climate-related matters include the following.
Key differences | VIU | FVLCD |
Assumptions | The starting point for cash flow projections is the company’s budgets and forecasts – i.e. it is based on management’s best estimate. [IAS 36.33] | The starting point for cash flow projections is the company’s budgets and forecasts, but these are adjusted to reflect a market participant’s assumptions. [IFRS 13.89] |
Perspective | Reflects the continuing use of the asset / CGU in its current condition. [IAS 36.6] | Reflects a sale of the asset / CGU to a hypothetical buyer, who might decide to use the asset / CGU in a different way. [IAS 36.6] |
Company-specific synergies | Included. | Excluded. |
Capital expenditure | Only includes capital expenditure to improve or enhance an asset's performance once the expenditure is incurred, or if it is akin to maintenance expenditure. [Insights 3.10.250] | Included, if consistent with a market participant’s perspective. |
Restructuring | Excluded, unless specifically committed under IAS 37 Provisions, Contingent Liabilities and Contingent Assets1. [IAS 36.46-47, Insights 3.10.260] | Included, if consistent with a market participant’s perspective. |
Forecast period | Maximum of five years, unless management can demonstrate its ability to forecast cash flows accurately beyond five years. [IAS 36.35] | Can be longer than five years, if consistent with a market participant’s perspective. |
Long-term growth rate (LTGR) | LTGR steady or declining, consistent with that of the product / industry / country, unless an increase is in line with objective information. | Reflects a LTGR that a market participant would use. |
Yes. Climate-related matters may affect the ‘higher of’ conclusion if, for example, climate-related opportunities are reflected in FVLCD but not in VIU. For example, reflecting uncommitted restructurings and capital expenditure to enhance assets is restricted in VIU calculations but not in FVLCD calculations.
In some cases, it can be challenging to determine whether future asset improvements are more akin to maintenance expenditure or to capital improvement. In such cases, using FVLCD may allow those cash flows to be included this aligns with a market participant’s perspective. See Question 9.
Two approaches can be used for projecting cash flows to calculate present value – the traditional approach and the expected cash flow (ECF) approach. These approaches are relevant to both VIU and FVLCD. [IAS 36.A2]
The traditional approach uses a single (most likely) cash flow projection and does not involve adjustments to the cash flows for their risk. In contrast, the ECF approach uses multiple probability-weighted cash flow projections.
For information on the discount rate under each of the approaches, see the Discount rate page.
It depends. Although the traditional approach is more commonly used, it may sometimes be less suitable for reflecting climate-related matters, whereas the ECF approach may be useful in identifying and modelling various potential outcomes and provides computational transparency of the expected cash flows. However, one of the main challenges in using it is estimating the probabilities assigned to each scenario.
In certain cases, climate-related matters may be more appropriately captured by using two or more cash flow scenarios – i.e. by applying the ECF approach. This may be the case for companies that are significantly affected by climate-related risks. If significant downside scenarios are more likely and/or more severe than the upside scenarios, then climate-related matters may be more appropriately captured under the ECF approach. [IAS 36.A2, A7]
Reflecting climate-related matters
Climate-related risks and opportunities may significantly affect a company’s strategy, as well as its expectations of revenues, opex (including research and development) and capex, in different ways. The following table highlights some examples.
| Customer and supplier behaviour | Revenue and growth may change as customer preferences shift towards more sustainable products. The cost base may also change because of the impact of climate-related matters on suppliers – e.g. suppliers may pass increased costs through the supply chain. |
| Government policies and legislation | The introduction of new climate-related policies or legislation – e.g. a new carbon tax – may affect revenues or operating costs. |
| Technological developments | Emerging green technology may affect a company’s competitiveness in the market and result in higher capex to develop or acquire equivalent technology. |
| Physical impacts | Changes, such as rising temperatures or an increase in the frequency and severity of extreme weather events, may give rise to higher insurance or maintenance expenditure. They may even limit the suitability of current operating locations. |
Some companies have climate-related opportunities as well as risks. For example, proactive companies that develop green products or implement decarbonisation plans may gain access to new markets, benefit from shifting consumer preferences or improve energy efficiency.
It depends on the specific facts and circumstances applicable to the asset (or CGU).
In valuation practice, the impact of climate-related matters is generally reflected in the cash flows rather than in the discount rate, whenever possible. This may not be possible when cash flow projections are affected by circumstances or events that are outside the company’s control and there is no data or evidence to support the cash flow projection.
In some cases, climate-related matters may be reflected both in the cash flows and the discount rate – for example, because climate-related measures are expected to change the cash flows (by reducing revenues or by increasing opex/capex) and increase the risk or range of outcomes of these cash flows.
Adjustments to the discount rate may be made if they can be supported and do not result in double counting. For more information on the discount rate, see the Discount rate page.
No. The Paris Agreement2 is an international treaty that does not specify how individual companies operate.
Under value in use (VIU), the cash flow projection needs to be consistent with management's best estimate of future cash flows. Management's expectations may not necessarily be ‘Paris-aligned’. There is no requirement under IFRS® Accounting Standards for such an alignment.
Similarly, under fair value less costs of disposal (FVLCD), the cash flow projection needs to be consistent with a market participant’s assumptions, which again, may not necessarily be ‘Paris-aligned’.
It depends on whether the company is calculating the recoverable amount based on VIU or FVLCD.
| VIU | Under VIU, cash flow projections:
Management needs to apply judgement when determining whether capex expected to be incurred in response to climate-related matters (e.g. making an asset compliant with climate-related laws or regulations) is more akin to capital improvements or to maintenance expenditure (see Question 9). *In our view, capex should be considered incurred once the project has substantively begun, rather than it being necessary for the project to have been completed. [Insights 3.10.250.20] |
| FVLCD | FVLCD is a market-based measurement – it is measured using assumptions that market participants would use in pricing the CGU. Under FVLCD, maintenance and future capital expenditure to improve or enhance an asset’s performance (and any related benefits) is included in cash flow projections if this is consistent with a market participant's perspective. |
Maintenance expenditure will often include an element of improvement simply because of the natural process of technological advancement, which requires a company to replace old equipment with newer, more technologically advanced equipment that performs essentially the same function. Despite there being a technological upgrade, a replacement may still be considered ‘maintenance’. Therefore, in some cases a company needs to use significant judgement to determine whether planned capex on assets with shorter useful lives (i.e. compared with that of the essential asset with the longest useful life – see Question 10) is more akin to maintenance expenditure or capital improvements.
In our view, factors that a company may use in determining this include:
- the level of enhancement to the CGU’s capacity; and
- the extent of the change to the CGU’s production process and consequently to the nature of the CGU’s products.
For example, capex is more akin to maintenance expenditure if the CGU’s capacity (e.g. the number of items that can be produced or services provided) would not increase significantly as a result of the capex. [Insights 3.10.250.80]
If a CGU consists of several assets that are essential to the ongoing business of the company, then the impairment test is performed based on the essential asset with the longest useful life. The replacement of assets with shorter lives is considered part of the day-to-day servicing of that CGU, provided it maintains the CGU's level of economic benefits – i.e. the CGU's capacity remains the same. [IAS 36.49, Insights 3.10.230.60]
In some cases, a CGU may contain an intangible asset with an indefinite useful life or goodwill. In our view, a company cannot conclude automatically that the intangible asset with an indefinite useful life or goodwill is the essential asset. All facts and circumstances are considered in determining which asset is essential to the operations of the CGU. [Insights 3.10.230.70]
In our view, an essential asset need not be an asset recognised in the statement of financial position. For example, depending on the facts and circumstances of the CGU, it might be appropriate to conclude that the essential asset is an unrecognised brand. [Insights 3.10.230.90]
It depends on whether the company is calculating the recoverable amount based on VIU or FVLCD.
| VIU | Under VIU, cash flow projections:
For accounting purposes, a company is committed to a restructuring only when it meets the criteria to recognise a restructuring provision under IAS 37. [IAS 36.44–47, Insights 3.10.260] |
| FVLCD | Under FVLCD, future restructurings (and any associated benefits), whether they are committed or uncommitted, are included in cash flow projections if this is consistent with a market participant’s perspective. |
It depends. An increasing number of companies are making climate-related commitments3. Depending on the company’s strategy, meeting its commitment may involve, for example, significant expenditure on research and development to develop green products or services, capital expenditure to acquire or construct greener assets (and sell existing assets), restructurings or purchases of carbon credits to offset carbon emissions.
If a company makes a climate-related commitment, then the assumptions used in calculating the recoverable amount need to be consistent to the extent possible, considering the requirements of IAS 36 for VIU and IFRS 13 for FVLCD – see Question 1.
For example, if a company is committed to purchasing carbon credits to meet its commitment to offset its CO2 emissions, then its financial budgets or forecasts would reflect this commitment and future costs of purchasing carbon credits would be included in estimating VIU.
It depends. The following table highlights how a company might determine whether the recoverable amount should reflect the impact of future changes in climate-related regulation – e.g. through either the cash flows or the discount rate – when calculating VIU or FVLCD.
VIU | In our view, a company should consider the impact of future changes in non-income tax laws (e.g. a carbon tax law that is expected to be enacted). In practice, depending on the local legislative process, it may be challenging to determine the impact of the future changes. If sufficient information about future changes in laws is available and management’s best estimate is that the changes may have a significant impact on VIU, then we believe that the company should reflect the impact when determining VIU. [Insights 3.10.285] |
FVLCD | In our view, a company should consider the impact of future changes in non-income tax laws from a market participant’s perspective. This analysis should take into account whether such changes would be applicable or relevant to a market participant. In practice, depending on the local legislative process, it may be challenging to determine the impact of the future changes. If sufficient information about future changes in such laws is available and this information would allow a market participant to reflect the impact of these changes in FVLCD, then we believe that the company should reflect the impact when determining FVLCD. [Insights 3.10.205] |
1 For accounting purposes, a company is committed to a restructuring only when it meets the criteria to recognise a restructuring provision under IAS 37.
2 The Paris Agreement seeks to limit the rise in global temperatures to well below 2°C above pre-industrial levels and to pursue efforts to keep the rise to 1.5°C.
3 The reference to environmental or climate-related commitments assumes that, for example, an actual pledge, commitment or formal plan exists and that it is reflected in financial budgets or forecasts approved by management. Refer also to our article Net-zero commitments for guidance on defining a net-zero commitment and whether to recognise a liability.
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