Which technique may be used to evaluate the present value of future cashflow taking account of interest rate and uncertainty
Answers
Answer:
Simple Interest
Explanation:
Answer:
EXECUTIVE SUMMARY
FASB ISSUED CONCEPTS STATEMENT NO. 7 TO HELP CPAs who use present value and cash flow information as the basis for accounting measurements. Using Cash Flow Information and Present Value in Accounting Measurements includes general principles governing accountants’ use of present value, particularly when the amount of future cash flows, their timing or both, are uncertain.
THE STATEMENT INTRODUCES AN EXPECTED CASH flow approach that focuses on the explicit assumptions about the range of possible cash flows and their respective probabilities. It also describes techniques CPAs can use to estimate the fair value of liabilities, taking into account the entity’s credit standing.
CONCEPTS STATEMENT NO. 7 APPLIES ONLY TO measurements at initial recognition, to fresh start measurements and to amortization techniques based on future cash flows. It does not apply to measurements based on the amount of cash or other assets an entity pays or receives or on fair value observations in the marketplace.
FASB SAYS THE EXPECTED CASH FLOW APPROACH is a better measurement tool than the traditional approach in many circumstances. CPAs should use it to develop asset and liability values when there is no contractual cash flow—taking into account all expectations about possible cash flows rather than just the most likely one.
THE GUIDANCE IN THE FASB CONCEPTS STATEMENT applies to both liabilities and assets. Measuring liabilities involves problems that are different from measuring assets. When using present value to estimate the fair value of a liability, the objective is to estimate the value of the assets required to settle the liability with the holder or to transfer it to another entity.
ccountants use present value and cash flow information as a surrogate for fair value whenever an entity pays or receives a future stream of cash. Because this happens frequently in business, CPAs need guidance on using future cash flow as the basis for accounting measurements at initial recognition when making fresh-start measurements (see box below) and with the interest method of amortization. To provide them with this guidance, FASB issued Concepts Statement no. 7, Using Cash Flow Information and Present Value in Accounting Measurements.
Fresh-Start Measurements
Fresh-start measurements are those a company uses following initial recognition of an asset or liability to determine a new carrying amount that is unrelated to previous amounts. For example, FASB Statement no. 115, Accounting for Certain Investments in Debt or Equity Securities, requires companies in each reporting period to make fresh-start measurements for securities classified as “available-for-sale and trading,” as the company’s portfolio is “marked-to-market.” FASB Statement no. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of, uses fresh-start measurements when an exception or “trigger” requires a company to recognize an impairment.
SCOPE OF THE STATEMENT
Concepts Statement no. 7 includes general principles that govern accountants’ use of present value, especially when the amount of future cash flows, their timing, or both, are uncertain. This might happen when a business sells an asset and receives payments over time. The statement is limited to measurement issues (how much) and does not address recognition issues (when or if). It does not specify when fresh-start measurements are appropriate. Rather, FASB expects to decide whether a particular situation requires a fresh-start measurement or some other accounting response on a project-by-project basis.
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Explanation: