Estimates of future cash flows should include (i) Projections of net cash inflows from the continuing use of the asset and (ii) Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.
Care should be taken for the following points:
- When the carrying amount of an asset does not yet include all the cash outflows to be incurred before it is ready for use or sale, estimate of any further cash outflow that is expected to be incurred before the asset is ready for use or sale should be included.
- Cash inflows from assets that generate cash inflows from continuing use that are largely independent of the cash inflows from the asset under review should not be included.
- Cash outflows that relate to obligations that have already been recognised as liabilities to be excluded.
- Future cash outflows or inflows expected to arise because of restructuring of the organization should be not considered.
- Any future capital expenditure enhancing the capacity of the assets should be excluded.
- Any increase in expected cash inflow from the above expenditure should also be excluded.
- Estimates of future cash flows should not include cash inflows or outflows from financing activities and also income tax receipts or payments.
Foreign Currency Future Cash Flows are estimated in the currency it will be generated and after they are discounted for the time value of money, managers convert them in the reporting currency on the basis of AS 11.
The discount rate(s) should be a pre-tax rate (s) that reflect (s) current market assessments of the time value of money and the risks specific to the asset. The discount rate(s) should not reflect risks for which future cash flow estimates have been adjusted. A rate that reflects current market assessments of the time value of money and the risks specific to the asset is the return that investors would require if they were to choose an investment that would generate cash flows of amounts, timing and risk profile equivalent to those that the enterprise expects to derive from the asset.