You are the Accounting Manager in the Financial Reporting Department at a mid-sized manufacturing company on Long Island. Yesterday, you attended a meeting between your Controller, John Harrison, and the external auditing firm. During the meeting, a discussion developed regarding the use of present value to measure certain assets and liabilities in the company’s financial statements.
During the meeting, it was evident that the Controller was very knowledgeable about the “traditional” PV methodology that he had learned in his finance classes. The external auditors began to discuss the “expected present value” technique that is introduced in Statement of Financial Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements (Concepts Statement 7). Unfortunately, the Controller was unfamiliar with this present value technique and how it is presently employed in existing GAAP. You were unfamiliar with it also, so you kept quiet.
After the meeting, John asked you to write a memorandum to him, in good form, that addresses the following questions:
- According to Concepts Statement 7, what is the objective of using present value in accounting measurement? Also explain in your own words.
- According to Concepts Statement 7, when would a company need and not need to use present value when making the initial measurement of an asset or liability? Also explain in your own words.
- Using the ASC, identify and briefly describe three accounting areas where the expected present value methodology discussed in Concepts Statement 7 is specifically cited as the basis of measurement of an asset or liability (or where the literature recommends it as the basis of measurement). Include the proper ASC references and a brief discussion of each in your answer.
- Based on the above information, what other actions do you believe might be advisable at this time. Include them in the memo.
Instruction: Prepare your accounting issues memorandum following the formats in the text and your prior memos. Be sure to incorporate edits and suggestions (format, etc.) Your memo must be at lease 1 ½ pages, single spaced. Make sure that your conclusion is supported by research. The quality of your memo should be the same as if you were handing it to your boss.
Make sure that your conclusion is supported by research. Use US GAAP codification for your discussion and conclusion. Please do not use other codification such as IFRS.