Page 9 - 10. COMPILER QB - INDAS 36

During the year ended 31st March, 20X3, East sold 10 000 steering wheels at a selling price of 190 per wheel.
The most recent financial budget approved by East’s management, covering the period 1st April, 20X3 – 31st
March, 20X8, including that the company expects to sell each steering wheel for 200 during 20X3-X4, the

price rising in later years in line with a forecast inflation of 3 per cent per annum.
During the year ended 31st March, 20X4, East expects to sell 10 000 steering wheels. The number is forecast
to increase by 5 per cent each year until 31st March, 20X8.
East estimates that each steering wheel costs 160 to manufacture, which includes Rs110 variable costs, Rs30
share of fixed overheads and 20 transport costs.

Costs are expected to rise by 1% during 20X4-X5, & then by 2 per cent per annum until 31st March, 20X8.
During 20X5-X6, the machine will be subject to regular maintenance costing 50,000.
In 20X3-X4, East expects to invest in new technology costing 100 000. This technology will reduce the
variable costs of manufacturing each steering wheel from 110 to 100 and the share of fixed overheads from 30
to 15 (subject to the availability of technology, which is still under development).

East is depreciating the machine using the straight-line method over the machine’s 10 year estimated useful
life. The current estimate (based on similar assets that have reached the end of their useful lives) of the
disposal proceeds from selling the machine is Rs 80 000 net of disposal costs. East expects to dispose of the
machine at the end of March, 20X8.
East has determined a pre-tax discount rate of 8 per cent, which reflects the market’s assessment of the
time value of money and the risks associated with this asset.

Assume a tax rate of 30%. What is the value in use of the machine in accordance with Ind AS 36?
SOLUTION

v.imp note for the answer - Calculation of the value in use of the machine owned by East Ltd. (East)
includes the projected cash inflow (i.e. sales income) from the continued use of the machine and projected
cash outflows that are necessarily incurred to generate those cash inflows (i.e cost of goods sold).
Additionally, projected cash inflows include Rs 80,000 from the disposal of the asset in March, 20X8. Cash
outflows include routing capital expenditures of Rs 50,000 in 20X5-X6

As per Ind AS 36, estimates of future cash flows shall not include:
• Cash inflows from receivables
• Cash outflows from payables
• Cash inflows or outflows expected to arise from future restructuring to which an entity is not yet committed
• Cash inflows or outflows expected to arise from improving or enhancing the asset’s performance

• Cash inflows or outflows from financing activities
• Income tax receipts or payments.
Hence in this case, cash flows do not include financing interest (i.e. 10%), tax (i.e. 30%) and capital
expenditures to which East has not yet committed (i.e. Rs 100 000). They also do not include any savings in
cash outflows from these capital expenditures, as required by Ind AS 36.
The cash flows (inflows and outflows) are presented below in nominal terms. They include an increase of 3%

per annum to the forecast price per unit (B), in line with forecast inflation. The cash flows are discounted by
applying a discount rate (8%) that is also adjusted for inflation.
Note: Figures are calculated on full scale and then rounded off to the nearest absolute value.

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