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

'Value in use' refers specifically to the present value of the future cash flows that an asset is expected to generate during its useful life. This concept is crucial for determining the recoverable amount of an asset, which is used in impairment testing. The recoverable amount is the higher of fair value less costs to sell and value in use.

When establishing the value in use, an entity must forecast the cash flows that the asset will generate and discount them to reflect their present value. This value takes into account the time value of money—acknowledging that a dollar earned in the future is worth less than a dollar earned today. This approach is essential for understanding how much value an asset contributes to an entity, and it aids in assessing whether the recognized carrying amount exceeds its recoverable amount.

The other options do not represent 'value in use'. The original purchase price is historical cost and does not consider future cash flows. The carrying amount reflects what is currently recorded in the books, which can differ significantly from value in use. Lastly, fair value less costs to sell concerns market conditions and does not capture the specific value generated from the asset's future cash flows. Thus, the definition that accurately represents 'value in use' is directly linked to the