Background
IASC was working toward publishing an Issues Paper some time in 2001. Under the new IASB, it is more likely that this project will become part of the new Measurement Project.
Key Issues
- When should assets and liabilities be measured at their present value (discounted)?
- How should present value be determined in those International Accounting Standards that require or permit discounting?
- How should the effect of using discounting be presented and disclosed in financial statements?
Discounting issues have arisen in many IASC projects, including income taxes (IASC decided not to measure deferred income taxes on a discounted basis), employee benefits (pension obligations are measured at present value), impairment of assets (value in use is a present value measurement), provisions (present value and expected value are interrelated here), and financial instruments.
The IASC project is seeking to develop consistent and practicable criteria for when discounting is appropriate and how present value measurements should be made. The project might lead to changes to the IASC Framework, or possibly a separate Standard on discounting, or possibly amendments to existing standards -- or more than one of those.
Steering Committee Tentative Conclusions
The IASC present value steering committee was developing an issues paper to solicit public comment. The committee reached a number of tentative conclusions. Its most fundamental conclusion is that present value principles should be used in all measurements that are based on future cash flows, unless the effect of doing so is immaterial.
The steering committee also has concluded that the discount rate should reflect current market interest rates and the risks inherent in the particular asset or liability being measured rather than the enterprise's incremental borrowing rate or cost of capital. A different discount rate should be used for each future period to reflect yield curve effects, although a single rate may be a reasonable approximation.
IASC was working toward publishing an Issues Paper some time during 2001. Under the new IASB, it is more likely that this project will become part of the new Measurement Project. A separate issues paper on present value may not be issued.
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