ACCA Strategic Business Reporting (SBR) Practice Exam

IAS 36, which covers the impairment of assets, specifies that the discount rate used for value in use calculations should indeed be a pre-tax rate that reflects the risks specific to the asset being assessed. This is crucial because the value in use represents the present value of the future cash flows expected to be derived from an asset. A pre-tax discount rate is necessary to accurately reflect the expected cash flows without incorporating the effects of tax, which can distort the assessment.

Furthermore, the requirement for the rate to account for risks ensures that it appropriately reflects the uncertainty associated with the cash flows specific to the asset in question. This means the discount rate should be adjusted for the risk profile of the asset rather than relying on standardized rates that may not truly capture the particular risks involved.

The other choices do not align with the guidelines provided by IAS 36. For instance, using the company's average borrowing rate would not necessarily encapsulate the unique risks of the asset, while reflecting past performance does not address future cash flow expectations vital for value in use calculations. Setting the discount rate by industry standards lacks the nuance needed for specific risk assessments that impact the asset's cash flows.