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

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Course of Action Cash Flows Estimate (Use) Cash Flows Estimate (Disposition) Cash Flows Estimate (Total) (in $ millions) Probability Assessment Possible Cash Flows (Probability- Weighted) Cash Flows Sell in 2 years $ 8 $30 $38 20% $ 7.6 11 30 41 50 20.5 13 30 43 30 12.9 $41.0 Sell in 10 years 36 1 37 20 $ 7.4 48 1 49 50 24.5 55 1 56 30 16.8 $48.7 f. Paragraph A8: In computing the future cash flows used to test the facility for recoverability, the entity concludes that there is (a) a 60 percent probability that the facility will be sold at the end of 2 years and (b) a 40 percent probability that the facility will continue to be used for its remaining estimated useful life of 10 years.As further indicated in the following table, there is a 60 percent probability that the facility will be sold in 2 years and a 40 percent probability that the facility will be sold in 10 years. The following table shows the computation of future cash flows based on the probability of those alternative courses of action. 27 As shown, those futurethe expected cash flows are $44.1 million (undiscounted). Therefore, the carrying amount of the facility of $48 million would not be recoverable. Course of Action Possible Cash Flows (Probability- Weighted) Cash Flows (in $ millions) Probability Assessment (Course of Action) Expected Cash Flows (Undiscounted) Sell in 2 years $41.0 60% $24.6 Sell in 10 years 48.7 40 19.5 $44.1 134
g. Paragraph A11 and its related footnote 28: This example illustrates the application of an expected present value technique to estimate the fair value of a long-lived asset in an impairment situation.the absence of an observable market price (paragraph 23). 28 It is based on the facts provided for the manufacturing facility in Example 2. 28 Present value is the current measure of an estimated future cash inflow, discounted at an interest rate for the number of periods between today and the date of the estimated cash flow. The present value of $X in n periods in the future and discounted at interest of i per period is computed using the formulaX/(1+i) n . Because all of the risks are considered in the estimates of cash flows, the entity discounts the expected cash flows for each year using the risk-free rate of interest. The risk-free rate of interest is the interest rate on monetary assets that are essentially risk free and that have maturity dates that coincide with the expected timing of the cash flow. In the United States, the risk-free rate is the rate for zero-coupon U.S. Treasury instruments. A yield curve for U.S. Treasury instruments may be used to determine the appropriate risk-free rates of interest. h. Paragraph A12 and its related footnote 29: Consistent with an objective of measuring fair value, the entity’s estimates of future cash flows used to test the manufacturing facility for recoverability in Example 2 are adjusted to incorporate assumptions that, based on available information, marketplace participants would use in their estimates of the fair value of the asset. The net effect of those adjustments is to increase the entity’s estimates of future cash flows (on an undiscounted basis) by approximately 15 percent. 29 29 In this example, a reliable estimate of the market risk premium is not available. Paragraph 62 of FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, explains: An estimate of fair value should include the price that marketplace participants are able to receive for bearing the uncertainties in cash flows—the adjustment for risk—if the amount is identifiable, measurable, and significant. An arbitrary adjustment for risk, or one that cannot be evaluated by comparison to marketplace information, introduces an unjustified bias into the measurement. On the other hand, excluding a risk adjustment (if it is apparent that marketplace participants include one) would not produce a measurement that faithfully represents fair value. There are many techniques for estimating a risk adjustment, including matrix pricing, option-adjusted spread models, and fundamental analysis. However, in many cases a reliable estimate of the market risk premium may not be obtainable or the amount may be small relative to potential measurement error in the estimated cash flows. In such situations, the present value of expected cash flows, discounted at a risk-free rate of interest, may be the best available estimate of fair value in the circumstances. 135
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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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asset or liability. The Board concl
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alone, would not be cost beneficial
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in the statement of financial posit
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Page 97: International Financial Reporting S
Page 100 and 101: Pronouncement Statement 65* Stateme
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Page 104 and 105: Pronouncement FSP AAG INV-1 and SOP
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Page 110 and 111: E6. FASB Statement No. 19, Financia
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Page 114 and 115: cost or marketfair value for each t
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Page 124 and 125: . Paragraph 112 (glossary), as amen
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Page 130 and 131: value of an asset (or liability) in
Page 132 and 133: securities. An acquiring entity oft
Page 134 and 135: as the basis for the measurement, i
Page 136 and 137: of those cash flows that are embodi
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Page 142 and 143: Date Incurred 12/31/03 12/31/04 12/
Page 144 and 145: market prices in active markets are
Page 148 and 149: i. Paragraph A13: The following tab
Page 150 and 151: accordance with paragraph 7, the en
Page 152 and 153: expected present value technique of
Page 154 and 155: E29. Statement 133 Implementation I
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