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The discount rate: a note on IAS 36

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  • Husmann, Sven
  • Schmidt, Martin
  • Seidel, Thorsten

Abstract

Measurement in financial accounting often requires determining an interest rate to discount future cash flows. One example is the International Accounting Standard (IAS)36 Impairment of assets. IAS 36´s impairment test requires determining a value in use (a present value). The Appendix A to the standard gives some guidance on how to determine a suitable discount rate. In this paper, we show that the different approaches included in IAS 36´s guidance are theoretically different. We discuss how the standard should be interpreted and applied based on the theoretical background of financial theory. Only the first alternative, we weighted cost of capital should be used and the other two alternatives should be discarded. In addition, we show that IAS 36´s guidance, applied in practice, may give rise to substential measurement errors.

Suggested Citation

  • Husmann, Sven & Schmidt, Martin & Seidel, Thorsten, 2006. "The discount rate: a note on IAS 36," Discussion Papers 246, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
    • Handle: RePEc:zbw:euvwdp:246
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    Cited by:

    1. Aschfalk-Evertz, Agnes & Oliver, Rüttler, 2013. "Goodwill impairment testing according to IFRS in the United Kingdom: An empirical analysis of the discount rates used by the thirty largest FTSE 100 companies," Working Papers 75, Berlin School of Economics and Law, Institute of Management Berlin (IMB).

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