[HushedChoas]

Why do we use present value and future value for concepts such as bonds and leases, but nothing else?

What got me thinking was reviewing capital leases. In accounting for capital leases you have to include the PV of the guaranteed residual value in the lease obligation. However for fixed assets that you personally own and use, you do not use the PV of salvage value.

Essentially what qualifies something to use PV and FV versus ignoring it?

“Recipe for Success: Study while others are sleeping; work while others are loafing; prepare while others are playing; and dream while others are wishing.”  -William A. Ward

[vodrldnr]

Under SFAC, there are 5 recognition criteria

1. Historical cost

2. current cost

3. NRV

4. PV

5. FV (aka current market value)

and all asset and liability should be measured among five measurement criteria.

if you ask why we have to use PV and Future value Concept for Bond and Lease, my answer is it's required by GAAP.

the most prevalent measurement criteria is historical proceed. However there are many situations where we cannot precisely measure proceed. for example, if you are supposed to receive $100 cash every year for next 10 year . how can you measure it and what amount will be on today( $1 50 years ago is different from $ 1 today) ??? you don't know the exact value of $100 which will be paid. in situation like this, you cannot use historical proceed measurement and you have to turn into assumption and guess what amount of $100 *10 year will be today ( : PV concept)

In a word, the ground for CPA to use PV or Fair value is when we cannot measure the value based on historical cost,

then you will be wonder what kind of input we will use to determine FV or PV

Regarding FV

we have 3 approach
there are hierarchy of input to measure PV (from level 1 to 3)

Market approach=> input for market price level 1,2,3. ( the quoted input)
Income approach=> discount FCF (PV technique is used here)
Cost approach => current cost (replacement cost) with similar asset

It ain't About How Hard You Hit

[Author]

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