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

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d. The price for bearing the uncertainty inherent in the cash flows (risk premium). e. Other case-specific factors that would be considered by market participants. f. In the case of a liability, the nonperformance risk relating to that liability, including the reporting entity’s (obligor’s) own credit risk. General Principles B3. Present value techniques differ in how they capture those elements. However, certain general principles govern the application of any present value technique: a. Cash flows and discount rates should reflect assumptions that market participants would use in pricing the asset or liability. b. Cash flows and discount rates should consider only factors attributed to the asset (or liability) being measured. c. To avoid double counting or omitting the effects of risk factors, discount rates should reflect assumptions that are consistent with those inherent in the cash flows. 23 d. Assumptions about cash flows and discount rates should be internally consistent. For example, nominal cash flows (that include the effect of inflation) should be discounted at a rate that includes the effect of inflation. The nominal risk-free interest rate includes the effect of inflation. Real cash flows (that exclude the effect of inflation) should be discounted at a rate that excludes the effect of inflation. Similarly, after-tax cash flows should be discounted using an after-tax discount rate. Pretax cash flows should be discounted at a rate consistent with those cash flows (for example, a U.S. Treasury rate is quoted on a pretax basis, as is a LIBOR rate or a prevailing term loan rate). e. Discount rates should be consistent with the underlying economic factors of the currency in which the cash flows are denominated. Risk and Uncertainty B4. A fair value measurement, using present value, is made under conditions of uncertainty because the cash flows used are estimates rather than known amounts. In 23 For example, a discount rate that reflects expectations about future defaults is appropriate if using contractual cash flows of a loan (discount rate adjustment technique). That same rate would not be used if using expected (probability-weighted) cash flows (expected present value technique) because the expected cash flows already reflect assumptions about future defaults; instead, a discount rate that is commensurate with the risk inherent in the expected cash flows should be used. 38
many cases, both the amount and timing of the cash flows will be uncertain. Even contractually fixed amounts, like the payments on a loan, will be uncertain if there is risk of default. B5. Risk-averse market participants generally seek compensation for bearing the uncertainty inherent in the cash flows of an asset or liability (risk premium). A fair value measurement should include a risk premium reflecting the amount market participants would demand because of the risk (uncertainty) in the cash flows. Otherwise, the measurement would not faithfully represent fair value. In some cases, determining the appropriate risk premium might be difficult. However, the degree of difficulty alone is not a sufficient basis on which to exclude a risk adjustment. B6. Present value techniques differ in how they adjust for risk and in the type of cash flows they use. For example, the discount rate adjustment technique uses a risk-adjusted discount rate and contractual, promised, or most likely cash flows; Method 1 of the expected present value technique uses a risk-free rate and risk-adjusted expected cash flows; and Method 2 of the expected present value technique uses a risk-adjusted discount rate (which is different from the rate used in the discount rate adjustment technique) and expected cash flows. Those present value techniques are discussed below. Discount Rate Adjustment Technique B7. The discount rate adjustment technique uses a single set of cash flows from the range of possible estimated amounts, whether contractual or promised (as is the case for a bond) or most likely cash flows. In all cases, those cash flows are conditional upon the occurrence of specified events (for example, contractual or promised cash flows for a bond are conditional on the event of no default by the debtor). The discount rate used in the discount rate adjustment technique is derived from observed rates of return for comparable assets or liabilities that are traded in the market. Accordingly, the contractual, promised, or most likely cash flows are discounted at a rate that corresponds to an observed market rate associated with such conditional cash flows (market rate of return). B8. The application of the discount rate adjustment technique requires an analysis of market data for comparable assets or liabilities. Comparability is established by considering the nature of the cash flows (for example, whether the cash flows are contractual or noncontractual and are likely to respond similarly to changes in economic conditions), as well as other factors (for example, credit standing, collateral, duration, restrictive covenants, and liquidity). Alternatively, if a single comparable asset or liability does not fairly reflect the risk inherent in the cash flows of the asset or 39
Page 1 and 2: Financial Accounting Series NO. 284
Page 3 and 4: Summary This Statement defines fair
Page 5 and 6: (blockage factor). This Statement e
Page 7: instruments as of the beginning of
Page 10 and 11: Copyright © 2006 by Financial Acco
Page 13 and 14: Statement of Financial Accounting S
Page 15 and 16: disaggregated) for purposes of appl
Page 17 and 18: Application to Assets 12. A fair va
Page 19 and 20: of the elements in the transaction,
Page 21 and 22: paragraph 19). The disclosure provi
Page 23 and 24: sufficient to absorb the quantity h
Page 25 and 26: c. For fair value measurements usin
Page 27: 38. At the date this Statement is i
Page 30 and 31: A3. The judgments applied in differ
Page 32 and 33: include those buyers that initially
Page 34 and 35: participants have technology in a m
Page 36 and 37: elevant data points in the market a
Page 38 and 39: in the fair value hierarchy within
Page 40 and 41: the one- and two-year options on th
Page 42 and 43: tions in which the price in a trans
Page 44 and 45: higher of its fair value in-use as
Page 46 and 47: measure fair value are required in
Page 48 and 49: Assets Measured at Fair Value on a
Page 52 and 53: liability being measured, it may be
Page 54 and 55: cash flows, it likely will be highe
Page 57 and 58: Appendix C BACKGROUND INFORMATION A
Page 59 and 60: Appendix C BACKGROUND INFORMATION A
Page 61 and 62: Scope Share-Based Payment Transacti
Page 63 and 64: epresent the fair value of the inst
Page 65 and 66: C20. Accordingly, the guidance for
Page 67 and 68: clearly, the Board revised the defi
Page 69 and 70: or liability (for example, a commod
Page 71 and 72: Application to Liabilities C39. For
Page 73 and 74: whether changes in a debtor’s cre
Page 75 and 76: entity’s credit standing makes th
Page 77 and 78: Valuation Techniques C53. This Stat
Page 79 and 80: C60. In its discussions, the Board
Page 81 and 82: generally provide the most reliable
Page 83 and 84: not sufficient to absorb the quanti
Page 85 and 86: similar guidance in paragraph AG72,
Page 87 and 88: that indicates that market particip
Page 89 and 90: asset or liability. The Board concl
Page 91 and 92: alone, would not be cost beneficial
Page 93 and 94: in the statement of financial posit
Page 95 and 96: adjustment to the opening balance o
Page 97: International Financial Reporting S
Page 100 and 101:
Pronouncement Statement 65* Stateme
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Pronouncement Interpretation 45* In
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Pronouncement FSP AAG INV-1 and SOP
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the proceeds received or the presen
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services received in exchange, and
Page 110 and 111:
E6. FASB Statement No. 19, Financia
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. Paragraph 8: Broadcasters may bar
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cost or marketfair value for each t
Page 116 and 117:
and cost required for the buyer to
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significant, tThe fair value of an
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Statement describe possible additio
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the fair value of the services rece
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. Paragraph 112 (glossary), as amen
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ase the estimate of future cash flo
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ased on valuation techniques) used
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value of an asset (or liability) in
Page 132 and 133:
securities. An acquiring entity oft
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as the basis for the measurement, i
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of those cash flows that are embodi
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current rate. Any downward revision
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current credit-adjusted risk-free r
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Date Incurred 12/31/03 12/31/04 12/
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market prices in active markets are
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Course of Action Cash Flows Estimat
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i. Paragraph A13: The following tab
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accordance with paragraph 7, the en
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expected present value technique of
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E29. Statement 133 Implementation I
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upon the assignment because the pro
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