What does 'value in use' refer to in the recoverable amount assessment?

In the context of the recoverable amount assessment, 'value in use' refers specifically to the estimated future cash flows that an asset is expected to generate through its use. This concept is central to impairment testing under accounting standards, such as IAS 36 (Impairment of Assets).

Value in use is calculated by projecting the future cash inflows and outflows associated with the asset, discounted back to their present value. This provides a comprehensive view of how much the asset is worth based on its operational capabilities and revenue generation potential rather than merely what it could fetch in a market sale or its historical cost.

Focusing on estimated future cash flows recognizes that an asset's value is not solely dependent on external market conditions or historical metrics, but rather on how effectively the asset can contribute to the generating of income over its useful life. This methodology is especially important in situations where an asset may not have an active market or where its selling price does not reflect its utility.

Other choices, such as historical cost, current market selling price, and replacement cost, do not capture the essential perspective that 'value in use' offers, which is grounded in operational and future performance rather than simple transactional or replacement valuations.