Concept No7 - Concept No 7 Using Cash Flow Information and...

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Concept No. 7 Using Cash Flow Information and Present Value in Accounting Measurements
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Definition of Fair Value The amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. It is a market price.
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EXAMPLE – Fair Value QUOTED MARKET PRICE OF MARKETABLE SECURITIES (E.G. IBM STOCK)
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Why Fair Value? Fair value provides the most complete and The most representationally faithful measurement of the economic characteristics of an asset or liability.
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Complete It is complete because marketplace participants apply all elements of a present value measurement in determining the amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties.
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Representationally faithful It is the most representationally faithful because it is consistent with its intension of measurement by capturing the economic difference among different sets of future cash flows so that it may most well inform the amount, timing and uncertainty of future cash flows.
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Economic difference among sets of future cash flows i. An asset with a fixed contractual cash flow of $10,000 due in 1 day. The cash flow is certain of receipt. ii. An asset with a fixed contractual cash flow of $10,000 due in 10 years. The cash flow is certain of receipt. iii. An asset with a fixed contractual cash flow of $10,000 due in 1 day. The amount that ultimately will be received is uncertain. It may be less than $10,000 but will not be more. iv. An asset with a fixed contractual cash flow of $10,000 due in 10 years. The amount that ultimately will be received is uncertain. It may be less than $10,000 but will not be more. v. An asset with an expected cash flow of $10,000 due in 10 years. The amount that ultimately will be received is uncertain, but it may be as high as $12,000, as low as $8,000, or some other amount within that range.
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Present Value to Estimate Fair Value Its objective is to estimate fair value. It is to capture the economic difference
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This document was uploaded on 08/05/2011.

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Concept No7 - Concept No 7 Using Cash Flow Information and...

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