Financial Accounting Standards For a long time present value measurements have been created with accounting valuation. While studying them, several accounting standards were issued. FASB ( Financial Accounting Standards Board) understood the importance of present value measurements, integrating with accounting valuation; and issued SFAC 7 ( Statement of Financial Accounting Concepts) in 2000. It had information about usage of cash flow information and present value in accounting measurements. New approach as to the estimation of cash flows were called the expected cash flow approach. It was distinguished from the traditional one; and renamed it into the discount rate adjustment method.
FSAB emphasizes that new project should be used mainly for complex measurements. These measurements ,as usual, deal with nonfinancial assets and liabilities without market value. The main task of using present value in SFAC 7 was defined as taking into account the economic difference between sets of future cash flows. Though the expected cash flow approach was pronounced more effective than the traditional one, but most experienced specialists use the traditional approach. They say that it is difficult to work with two cash flow concepts, which differ from each other greatly. By the way, it is not easy to identify the associated probabilities for every potential outcome.
The Essay on Proforma: Generally Accepted Accounting Principles and Judgmental Approach
In addition to forecasting cash flows, managers and investors are also interested in forecasts of the firm’s financial statements. These projected financial statements are called pro forma financial statements. They give both the management and investors an insight into what the financial statements will look like in the future and a signal as to any need to raise long-term funds. The starting ...
Thats why cash flow information and present value are used by many accountants to define, because such procedures happen rather frequently in business. It leads to the conclusion, that CPAs (Certified Public Accountants) need certain directions on using future cash flow, because it is the basis for accounting measurements. It is clear, that there were many pre conditions before Concepts Statement 7 was issued. First of all it was designed as a help for accountants who use present value and cash flow information. But the Statement is limited. For example, it cannot be applied while appropriating to fresh start measurements. If measurements are based on the amount of cash or fair values in the market place, CPAs should make measurements on them. Even when using the expected cash flow approach, it is necessary to control the risk free rate in discounting expected cash flows. The risk free rate is always used, while using the expected cash flow approach, but the discount rate is used with present value.
As it was pointed, when the amount of future cash flows are uncertain, I is necessary to use general principles, shown in SFAC 7. They are united into the probability weighted expected cash flows. It is clear, that though Concept Statement 7 gives valuable information on measuring and disclosing cash flows, but does not allow accountants to use flexibility, working with current cash flow treatments. This question is decided on a project by project basis by FASB. The situation becomes more complicated because of violation of the principles, which were established in SFAC 7. the temporary difference between book and tax income is too uncertain to be estimated.
Taking into account all pros and cons of the new statement, FASB is sure that the traditional approach is necessary in many situations, especially when future cash flows are on a contract base. But the Board expects that the new approach will be used more widely in cases, which are complicated. In fact, SFAC 7 will be applied to recent standards on asset retirement obligations, impairment losses and business combinations. To the conclusion, it must be pointed that Concepts Statement 7 works on a contrast of two approaches, and though the traditional approach enjoys the confidence, the expected cash flows approach considerates probabilities offering clear advantages.
The Dissertation on Related Literature to the Cash Flow Management
The role of cash flow information in discriminating between bankrupt and non-bankrupt companies remains a contentious issue. In a number of literature reviews on bankruptcy prediction (e. g. Zavgren, 1983; Jones, 1987; Neill et al. 1991; Watson, 1996) the common view is that cash flow information does not contain significant incremental information content over accrual information in ...
Bibliography:
David, T. Meeting; Linda, Garceau; Randall, W. Luecke.
Future Cash Flow Measurements. Journal of Accountancy, 2001 FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements. KPMGs definining issues, 04 12, 2004..
