I am confused about the difference among value in use, fair value and future cash flows. Can someone please explain the difference with an example? I’d really appreciate it. I am even more confused because this link says that “By definition “value in use” means the present value of the future cash flows expected to be derived from an asset.”

I think for the exam it is important to know first of all that both terms are (among other things) relevant for the determination of impairment of equipment, in particular with IFRS.

The rule says:

Impairment = Recoverable amount – Net carrying amount

where

Recoverable amount = max(Fair value less cost to sell; Value in use)

Fair value is nothing else than an estimate of the potential market price of the equipment in question (as your article points out, one should take into account the reliability of this estimate).

Value in use on the other hand is an estimate of the net cash flows (inflows-outflows) discounted to today’s value.

Example:

You have a Coffee machine which you use to sell coffee to your neighbors in the morning at the parking lot of your apartment complex.

What is the fair value of your machine?? Go to Amazon and check out what similar used machines are worth currently and there is your estimate

What is Value in use? This is a bit tougher but also possible to estimate. You sell $10 worth of coffee every morning, meanwhile you spend $5 for beans, paper cups, etc. So each day your net inflow of cash is $5. Let’s estimate that your machine will fall apart in 2 years, because coffee machines tend to do that (at least the ones I bought so far). Then you discount all those future cash flows back to today and there is your value in use.

If I well understood what I learnt Value in Use and Expected Future Cash Flow are quite similar, except Futur Cash Flow doesn’t take into account value of time, and any other disposal, while value in use does.

Fair value is the price you can have if you sell the asset on the market.

I might be wrong so if someone can confirm or infirm that would be nice

For the record, I call dibs on the business idea of selling coffee in the parking lot of an apartment complex. A friend of mine, who happens to be a real whiz when it comes to legal matters, told me that calling dibs in a forum is equivalent to a patent.