1.9 Cash Flow Information and Present Value

Question 1

Identify the 3 reasons the conceptual framework uses cash flows

Answer 1

• measurements at initial recognition
• fresh start measurements, and
• applications of the interest method of allocation

Question 2

What is the objective of cash flow information and present value?

Answer 2

to estimate fair value by distinguishing the economic differences between sets of future cash flows that may vary in amount, timing, and uncertainty

Question 3

Identify the 5 elements of a present value measurement

Answer 3

• Estimates of future cash flows
• Expected variability of their amount and timing
• The time value of money based on the risk-free interest rate
• The price of uncertainty inherent in an asset or liability
• Other factors, such as lack of liquidity or market imperfections

Question 4

What does the traditional approach to calculating present value use?

Answer 4

one set of estimated cash flows and one interest rate

Question 5

When is uncertainty reflected in the calculation of the present value?

Answer 5

in the choice of an interest rate

Question 6

When does the ECF or Expected Cash Flow approach apply?

Answer 6

• in more complex circumstances, such as when no market or no comparable item exists for an asset or liability.

Question 7

How is the the ECF calculated?

Answer 7

results from multiplying each possible estimated amount by its probability and adding the products

Question 8

What is expected present value?

Answer 8

the sum of the present values of estimated cash flows discounted using the same interest rate and weighted according to their probabilities

Question 9

What is the purpose of a present value measurement of the fair value of a liability?

Answer 9

to estimate the assets required to currently to:

• settle it
• transfer it to an entity of comparable credit standing

Question 10

Changes in estimated cash flows may result in: (2)

Answer 10

• a fresh start measurement or

- a change in the plan of interest amortization

Question 11

Given no re-measurement, when might the interest amortization plan be revised? (3)

Answer 11

by:

• Prospectively determining a new effective rate given the carrying amount and the remaining cash flows
• Retrospectively determining a new effective rate given (a) the original carrying amount, (b) actual cash flows, and (c) the newly estimated cash flows. The new rate is used to adjust the current carrying amount to the present value of the newly estimated cash flows
• Adjusting the carrying amount to the present value of the remaining cash flows discounted at the original rate