Academic journal article Journal of Accountancy

Measurement: The Big Picture

Academic journal article Journal of Accountancy

Measurement: The Big Picture

Article excerpt

The Financial Accounting Standards Board is issuing an exposure draft of a new concepts statement that addresses present-value-based measurement. If approved, it will be only the seventh such statement in the FASB's history and the first since 1985. The draft provides general guidance on measurements that are based on estimated future cash flows.

"CPAs often deal with situations in which estimated cash flows are the only available measurement tool. This happens in environmental and insurance liabilities and in impaired assets, for example," FASB Senior Project Manager Wayne Upton told the Journal. "Now a cash flow received or paid 10 years in the future is economically different from the same amount tomorrow. This concepts statement says that difference should be reflected in the financial statements. The ED provides some ground rules on how to do this." The draft does not cover recognition issues and assumes the CPA already has determined there is something to measure. "Basically, if you want to measure it, and cash flows are what you've got to work with, the ED says how to go about solving the problem," said Upton.

Risky business

A controversial aspect of the document, according to Upton, deals with risk. He said CPAs often discuss interest rates commensurate with risk. "Risk of what? What is commensurate?" He pointed out that credit cards have a higher interest rate than Treasury bills, for example, because one is a riskier proposition than the other. …

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