Companies commonly use a five-year forecast period when calculating the recoverable amount. If a company has an asset (or cash-generating unit (CGU)) with a useful life that extends beyond the forecast period, then the company needs to calculate a terminal value for the asset (or CGU).
The terminal value reflects the present value of the cash flows to be generated by an asset (or CGU) from the end of the forecast period until the end of the asset’s (or CGU’s) life, or to perpetuity if it does not have a limited useful life.
For many companies, the major impacts of climate-related matters are expected in the long term – far beyond the five-year forecast period that is typically used in practice for valuations of businesses. In such cases, it is the terminal value that is expected to be most affected by climate-related matters. If climate-related matters are expected to have a significant impact on the business, then the forecast period may need to be extended to reach a steady state (see Question 2).
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