Constraint and Present Value Flashcards
List and describe the constraints in the conceptual framework. Describe how cash flow and present value are used in accounting measurements.
1
Q
Present Value or Fair Value?
A
If fair value is available, then use fair value (market value), If not, then the present value is the best available technique to do the measurement.
How present value measurement is used:
1. PV should close to FV if possible.
2, The expected cash flow approach ( use a risk-free rate as the discount rate) is preferred to compute PV.
2
Q
Conservatism
A
Hold back the positive information under uncertain conditions but require to report the negative information when the negative outcome is likely.
3
Q
Cost constraint
A
When the cost of information exceeds its benefit, it should not be reported, but it can be disclose under foot note if it is material.
