Accounting Issues Research And Memouse Of Present Value In Accounting ✓ Solved
Accounting Issues research and Memo Use of Present Value in Accounting Measurements You are the Accounting Manager in the Financial Reporting Department at a mid-sized manufacturing company on Long Island. Yesterday, you attended a meeting between your Controller, John Harrison, and the external auditing firm. During the meeting, a discussion developed regarding the use of present value to measure certain assets and liabilities in the company’s financial statements. During the meeting, it was evident that the Controller was very knowledgeable about the “traditional†PV methodology that he had learned in his finance classes. The external auditors began to discuss the “expected present value†technique that is introduced in Statement of Financial Accounting Concepts No.
7, Using Cash Flow Information and Present Value in Accounting Measurements (Concepts Statement 7). Unfortunately, the Controller was unfamiliar with this present value technique and how it is presently employed in existing GAAP. You were unfamiliar with it also, so you kept quiet. After the meeting, John asked you to write a memorandum to him, in good form, that addresses the following questions: 1. According to Concepts Statement 7, what is the objective of using present value in accounting measurement?
Also explain in your own words. 2. According to Concepts Statement 7, when would a company need and not need to use present value when making the initial measurement of an asset or liability? Also explain in your own words. 3.
Using the ASC , identify and briefly describe three accounting areas where the expected present value methodology discussed in Concepts Statement 7 is specifically cited as the basis of measurement of an asset or liability (or where the literature recommends it as the basis of measurement). Include the proper ASC references and a brief discussion of each in your answer. 4. Based on the above information, what other actions do you believe might be advisable at this time. Include them in the memo.
Instruction: Prepare your accounting issues memorandum following the formats in the text and your prior memos. Be sure to incorporate edits and suggestions (format, etc.) Your memo must be at lease 1 ½ pages, single spaced . Make sure that your conclusion is supported by research. The quality of your memo should be the same as if you were handing it to your boss. Make sure that your conclusion is supported by research.
Use US GAAP codification for your discussion and conclusion. Please do not use other codification such as IFRS. Deadline is March 5th end of the day East Time You need: 1. A reference from a CPA firm. 2. Pre-codification reference.
Paper for above instructions
MemorandumTo: John Harrison, Controller
From: [Your Name], Accounting Manager
Date: [Insert Date]
Subject: Use of Present Value in Accounting Measurements
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Introduction
This memorandum addresses the discussion points raised during the recent meeting concerning the concept of present value (PV) and its implications for accounting measurements, particularly focusing on the "expected present value" technique as outlined in Statement of Financial Accounting Concepts No. 7 (SFAC No. 7).
Objective of Using Present Value in Accounting Measurement
According to SFAC No. 7, the primary objective of using present value in accounting measurement is to provide a more accurate representation of the future cash flows associated with an asset or liability. The rationale is that cash flows occurring in the future should be discounted to reflect the time value of money. In other words, a dollar today is worth more than a dollar tomorrow due to its potential earning capacity (Financial Accounting Standards Board [FASB], 2000). This perspective addresses the economic reality underlying the measurement of assets and liabilities, aligning financial reporting closer to the actual value experienced by stakeholders over time.
Essentially, by employing PV techniques, businesses can ensure that their financial statements reflect a more realistic economic scenario, which ultimately guides informed decision-making by investors, creditors, and management (Horngren et al., 2013).
When to Use Present Value Measurements
SFAC No. 7 further stipulates that present value should be used in measuring assets and liabilities under specific conditions. Companies must apply PV techniques when the future cash flows are identifiable and significant uncertainty exists regarding the timing and amount of those cash flows. This situation typically arises in scenarios involving contingent liabilities, long-term debt, and leases, where the cash flows extend beyond one accounting period and exhibit variability.
Conversely, a company does not need to use present value for initial measurements when: (a) the asset or liability is expected to be settled or realized within one year, and (b) the measurement reflects amounts readily ascertainable (FASB, 2000). In such cases, following historical cost accounting or other traditional methods may suffice, as the impact of discounting future cash flows is minimized.
In summary, the decision to use present value or not hinges upon the uncertainty of cash flows, their timing, and the measurement period involved.
Areas in Accounting Where Expected Present Value is Applied
The Accounting Standards Codification (ASC) outlines various areas where expected present value methodologies are employed or recommended as a measurement basis. Below are three key examples:
1. ASC 460 – Guarantees
The standard discusses loss contingencies and the requirement to measure guarantees based on the estimated cash outflows associated with future obligations. The expected present value framework allows the company to recognize liabilities related to guarantees accurately, thereby considering the probability of different cash flows over time (FASB, 2022).
2. ASC 805 – Business Combinations
ASC 805 requires that contingent consideration resulting from a business combination be measured at its fair value. The expected present value technique is explicitly specified for determining the fair value of expected future payouts, thus capturing uncertainties related to the outcomes of the acquired business's performance (FASB, 2022).
3. ASC 842 – Leases
In accounting for leases, the present value method is integral for measuring both lease liabilities and right-of-use assets. Companies must determine the present value of future lease payments to accurately reflect their financial obligations and asset rights within their balance sheets (FASB, 2021). This aligns with the expectations set forth by SFAC No. 7 when dealing with future cash flows.
Recommendations for Further Actions
Given your recent inquiry and the discussions from the meeting, I would recommend the following actions:
1. Training Workshop on Present Value Techniques
It would be advisable to arrange a training session for our Accounting Department to familiarize the team with both traditional and expected present value methodologies. This will empower us with the necessary knowledge to comply with relevant standards and apply appropriate measurement techniques.
2. Consulting with External Auditors
Since the external auditors demonstrated expertise regarding the expected present value technique, scheduling a discussion or workshop with them could provide additional insights and clarify our approach to applying these measurements in practice.
3. Review Accounting Policies
A thorough review of our current accounting policies concerning asset and liability measurement may ensure alignment with GAAP principles, particularly regarding the practical application of expected present value as noted in SFAC No. 7.
4. Documentation and Compliance
Establishing a systematic approach to document rationale and computations when utilizing present value in financial statements will enhance transparency and ensure consistency with FASB requirements.
Conclusion
Understanding and applying the expected present value methodology as defined in SFAC No. 7 and further specified in ASC is vital for producing accurate financial reports. By embracing these guidelines and recommendations, our company will be better positioned to reflect its financial condition and performance faithfully to stakeholders while adhering to US GAAP requirements.
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References
1. Financial Accounting Standards Board (FASB). (2000). Statement of Financial Accounting Concepts No. 7: Using Cash Flow Information and Present Value in Accounting Measurements. Norwalk, CT.
2. FASB. (2021). ASC 842 – Leases. Norwalk, CT.
3. FASB. (2022). ASC 460 – Guarantees. Norwalk, CT.
4. FASB. (2022). ASC 805 – Business Combinations. Norwalk, CT.
5. Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2013). Introduction to Financial Accounting. Upper Saddle River, NJ: Pearson.
6. KPMG. (2019). The Evolving Role of Present Value in Accounting. Available at: [KPMG](https://home.kpmg/xx/en/home/insights/2019/09/the-evolving-role-of-present-value-in-accounting.html)
7. PricewaterhouseCoopers (PwC). (2020). What you need to know about present value. Available at: [PwC](https://www.pwc.com/us/en/cfodirect/assets/pdf/financial-reporting/what-you-need-to-know-about-present-value.pdf)
8. Deloitte. (2019). Understanding Financial Reporting – Present Value Measurements. Available at: [Deloitte](https://www2.deloitte.com/us/en/pages/audit/articles/present-value-measurements.html)
9. Ernst & Young (EY). (2020). Present Value Concepts in Accounting and Their Applications. Available at: [EY](https://www.ey.com/en_us/assurance/present-value-concepts-in-accounting-and-their-applications)
10. American Institute of CPAs (AICPA). (2018). Implementing Accounting Standards Codification Topics: Understanding Discounting Cash Flows. Available at: [AICPA](https://www.aicpa.org/research/standards/financial-reporting/codification-topics.html)
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This memorandum provides an informed overview of present value in accounting measurements and incorporates necessary recommendations for further exploration and application within our company.