The discount rate, when calculating the value in use under IAS 36, represents (noun) the rate at which future cash flows are discounted to determine their present value. For instance, a company considering a new investment project might use a discount rate of 10% to calculate the project’s net present value.
The discount rate is crucial because it reflects (verb) the time value of money and the risk associated with the investment. By using a higher discount rate, companies can be more conservative in their valuation, reducing the risk of overpaying for an asset. Conversely, a lower discount rate can lead to a higher valuation but also increase the risk of acquiring an overvalued asset.