Fair Value Less Cost to Sell vs. Value in Use

Attribute	Fair Value Less Cost to Sell	Value in Use
Definition	Estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale	The present value of the future cash flows expected to be derived from an asset or cash-generating unit
Focus	Market-based	Income-based
Measurement	Market value	Present value of future cash flows
Use	For assets held for sale or disposal groups	For assets in use by the entity

Introduction

When it comes to determining the value of an asset, there are various methods that can be used. Two common approaches are Fair Value Less Cost to Sell (FVLCS) and Value in Use. While both methods aim to provide an accurate representation of an asset's value, they differ in their underlying assumptions and calculations.

Fair Value Less Cost to Sell

Fair Value Less Cost to Sell is a method used to determine the value of an asset if it were to be sold on the open market. This approach takes into account the fair market value of the asset, as well as any costs that would be incurred in order to sell the asset. These costs may include commissions, legal fees, and other expenses associated with the sale.

One of the key assumptions of FVLCS is that the asset is being sold in an orderly transaction between willing buyers and sellers. This means that the sale is not forced or distressed, and both parties have access to all relevant information about the asset. FVLCS is often used in situations where an asset is being actively marketed for sale, such as in the case of a business looking to divest a non-core asset.

When calculating FVLCS, it is important to consider the condition of the asset, as well as any market trends that may impact its value. Appraisers may use a variety of methods to determine the fair market value of the asset, such as comparable sales data, income approaches, or cost approaches.

Overall, Fair Value Less Cost to Sell provides a snapshot of what an asset could be sold for in the current market conditions, taking into account any costs associated with the sale.

Value in Use

Value in Use, on the other hand, is a method used to determine the value of an asset based on its specific use within a business. This approach takes into account the cash flows that the asset is expected to generate over its useful life, as well as any costs associated with maintaining and operating the asset.

One of the key assumptions of Value in Use is that the asset will continue to be used in its current capacity for the foreseeable future. This means that the value of the asset is based on its ability to generate cash flows for the business, rather than its potential resale value on the open market.

When calculating Value in Use, it is important to consider factors such as the asset's useful life, expected cash flows, and discount rates. Appraisers may use a variety of methods to determine the value of the asset based on its use within the business, such as discounted cash flow analysis or income approaches.

Overall, Value in Use provides a more long-term perspective on the value of an asset, taking into account its ability to generate cash flows for the business over time.

Comparison

While both Fair Value Less Cost to Sell and Value in Use aim to provide an accurate representation of an asset's value, they differ in their underlying assumptions and calculations. FVLCS focuses on the fair market value of an asset in an open market sale, taking into account any costs associated with the sale. Value in Use, on the other hand, focuses on the cash flows that an asset is expected to generate within a business, taking into account its specific use and operating costs.

• FVLCS is often used in situations where an asset is being actively marketed for sale, such as in the case of a business looking to divest a non-core asset.
• Value in Use is more commonly used in situations where an asset is integral to the operations of a business, such as in the case of a manufacturing plant or equipment.

Ultimately, the choice between Fair Value Less Cost to Sell and Value in Use will depend on the specific circumstances surrounding the asset and the purpose of the valuation. Both methods have their own strengths and weaknesses, and it is important to carefully consider which approach is most appropriate in a given situation.