Question

Question: At a recent meeting of the accounting staff in your company, the controller raised the issue of using present value techniques to conduct impairment tests for some of the company’s fixed assets. Some of the more senior members of the staff admitted having little knowledge of present value concepts in this context, but they had heard about a FASB Concepts Statement that may be relevant. As the junior staff in the department, you have been asked to conduct some research of the authoritative literature on this topic and report back at the staff meeting next week. Instructions If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and access the FASB Statements of Financial Accounting Concepts. When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following items. (Provide paragraph citations.) (a) Identify the concept statement that addresses present value measurement in accounting. (b) What are some of the contexts in which present value concepts are applied in accounting measurement? (c) Provide definitions for the following terms: (1) Best estimate. (2) Estimated cash flow (contrasted to expected cash flow). (3) Fresh-start measurement. (4) Interest methods of allocation

Short answer

Answer

The concept is concept no.7, the present value concepts are the basis of various accounting concepts, and the definition provided in concept no. 7 are the best estimate, estimated cash flow, fresh start measurements, and interest methods of allocation.

Step-by-step solution

Answer for part A

The concept which addresses the cash flow measurement and present value in accounting is concept no. 7 issued by the FASB

Answer for Part B

The present value concepts are the basis of various accounting concepts such as pricing of stocks, bond pricing, financial modeling, insurance, lottery payouts, pension funds, and banking.

Answer for part C

The definitions are provided in Concept no. 7 are as follows:

1. Best Estimate: It is defined as the single most-likely amount in a range of possible estimated amounts.
2. Estimated cash flows: It is defined as the single amount to be received or paid in the future.
3. Fresh Start Measurement: It refers to the measurements in periods following the initial recognition.
4. Interest methods of allocation: It refers both to the convention for periodic reporting and to the several approaches which deal with the changes in estimated future cash flows.