Statement of Financial Accounting Standards No. 157 - Paper Audit ...

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current credit-adjusted risk-free rate of 8 percent. All other assumptions remain unchanged. The revised estimate of expected cash flows for labor costs is as follows: Cash Flow Estimate Probability Assessment Expected Cash Flows $110,000 30% $ 33,000 137,500 45 61,875 192,500 25 48,125 $143,000 m. Paragraph C7: [For ease of use, only the portion of this example affected by this Statement has been reproduced.] Subsequent Measurement of the ARO Liability Reflecting a Change in Labor Cost Estimate as of December 31, 2004 Revised Incremental Expected Cash Flows 12/31/04 Incremental expected labor costs ($143,000 – $131,250) $11,750 Allocated overhead and equipment charges (.80 × $11,750) 9,400 Contractor’s markup [.20 × ($11,750 + $9,400)] 4,230 Expected cash flows before inflation adjustment 25,380 Inflation factor assuming 4 percent rate for 8 years 1.3686 Expected cash flows adjusted for inflation 34,735 Market-risk premium (.05 × $34,735) 1,737 Expected cash flows adjusted for market risk $36,472 Expected Ppresent value of incremental liability using credit-adjusted risk-free rate of 8 percent for 8 years $19,704 128
n. Paragraph C8: Example 3 depicts an entity that places a nuclear utility plant into service on December 31, 2003. The entity is legally required to decommission the plant at the end of its useful life, which is estimated to be 20 years. Based on the requirements of this Statement, the entity recognizes a liability for an asset retirement obligation and capitalizes an amount for an asset retirement cost over the life of the plant as contamination occurs. The following schedule reflects the undiscounted expected cash flows and respective credit-adjusted risk-free rates used to measure each portion of the liability through December 31, 2005, at which time the plant is 90 percent contaminated. Date Undiscounted Expected Cash Flows Credit-Adjusted Risk-Free Rate 12/31/03 $23,000 9.0% 12/31/04 1,150 8.5 12/31/05 1,900 9.2 o. Paragraph C9: On December 31, 2005, the entity increases by 10 percent its estimate of undiscounted expected cash flows that were used to measure those portions of the liability recognized on December 31, 2003, and December 31, 2004. Because the change results in an upward revision to the undiscounted estimated cash flows, the incremental estimated cash flow is discounted at the current credit-adjusted risk-free rate of 9.2 percent. As a result, $2,300 (10 percent of $23,000) plus $115 (10 percent of $1,150) plus $1,900 (resulting from contamination in 2005), which totals $4,315 of incremental undiscounted cash flows are discounted at the then current credit-adjusted risk-free rate of 9.2 percent and recorded as a liability on December 31, 2005., which results in an upward revision to the expected cash flows. Accordingly, the incremental expected cash flows of $2,415 [$2,300 (10 percent of $23,000) plus $115 (10 percent of $1,150)] are discounted at the then current credit-adjusted risk-free rate of 9.2 percent and recorded as a liability on December 31, 2005. [For ease of use, only the portion of this example affected by this Statement has been reproduced.] 129
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Financial Accounting Series NO. 284
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Summary This Statement defines fair
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(blockage factor). This Statement e
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instruments as of the beginning of
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Copyright © 2006 by Financial Acco
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Statement of Financial Accounting S
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disaggregated) for purposes of appl
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Application to Assets 12. A fair va
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of the elements in the transaction,
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paragraph 19). The disclosure provi
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sufficient to absorb the quantity h
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c. For fair value measurements usin
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38. At the date this Statement is i
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A3. The judgments applied in differ
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include those buyers that initially
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participants have technology in a m
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elevant data points in the market a
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in the fair value hierarchy within
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the one- and two-year options on th
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tions in which the price in a trans
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higher of its fair value in-use as
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measure fair value are required in
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Assets Measured at Fair Value on a
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d. The price for bearing the uncert
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liability being measured, it may be
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cash flows, it likely will be highe
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Appendix C BACKGROUND INFORMATION A
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Appendix C BACKGROUND INFORMATION A
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Scope Share-Based Payment Transacti
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epresent the fair value of the inst
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C20. Accordingly, the guidance for
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clearly, the Board revised the defi
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or liability (for example, a commod
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Application to Liabilities C39. For
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whether changes in a debtor’s cre
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entity’s credit standing makes th
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Valuation Techniques C53. This Stat
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C60. In its discussions, the Board
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generally provide the most reliable
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not sufficient to absorb the quanti
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similar guidance in paragraph AG72,
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that indicates that market particip
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Page 150 and 151: accordance with paragraph 7, the en
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