Concepts Statement No 7

SCOPE OF THE STATEMENT Concepts Statement no. 7 includes general principles that govern accountants’ use of present value, especially when the amount of future cash flows, their timing, or both, are uncertain. This might happen when a business sells an asset and receives payments over time. The statement is limited to measurement issues (how much) and does not address recognition issues (when or if). It does not specify when fresh-start measurements are appropriate. Rather, FASB expects to decide whether a particular situation requires a fresh-start measurement or some other accounting response on a project-by-project basis. Concepts Statement no. 7 applies only to measurements at initial recognition, to fresh-start measurements and to amortization techniques based on future cash flows. CPAs should not apply it to measurements based on the amount of cash or other assets an entity pays or receives or on observations of fair values in the marketplace. If such transactions or observations exist, CPAs should base measurements on them, not on future cash flows.A CPA who uses accounting measurements at initial recognition and when making fresh-start measurements should try to capture the elements that would make up a market price (fair value) if one existed. The marketplace is the final arbiter of asset and liability values. The objective of using present value is to estimate the likely market price if one existed. The statement introduces an expected cash flow approach focusing on the explicit assumptions about the range of possible cash flows and their respective probabilities. This means a business would evaluate the cash flows it expected to receive from a particular asset and assign a probability to each one. Concepts Statement no. 7 describes techniques for estimating the fair value of liabilities, taking into account the entity’s credit standing at initial recognition and when making fresh-start measurements, as required under GAAP. The statement also describes