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ure 2
ACCT 332 Accounting
g Thought and Practice
Accounting Underr Ideal Conditions
- Chapter
p 2
Concept of Ide
eal Conditions
With Certainty:
F t
Future
cash
h flows
fl
are known
Probabilities of states
Ex post realization of th
he state is publically
observable
Fixed interest rates
One interest rate means simply that everyone agrees on the same
base interest rate (w/o premiums), not that there is only one
interest rate in the economy.
Financial Stateme
ents in this Setting
Done
Done
Financial Stateme
ents in this Setting
Characteristics of fin
nancial statements:
F/S are relevant and reliable
Net income has no inforrmation content beyond B/S
Dividends are irrelevantt
may be able to lock down the interest rate, but we may not
Discount rates? We
all agree on the same discount rate.
financial
Ex post realization of
o the state? Biased/inaccurate
reporting.
Lack of Idea
al Conditions
Incomplete markets
Significance:
Si
ifi
Cannot
C
t alw
lways use market
k t value
l as
proxy for present value
Reasons for Incompletene
ess
thin markets
i f
information
ti asymmetry
t
Implications of the La
ack of Ideal Conditions
Estimates needed to apply current value accounting
Future
F
t
state
t t realizations
li ti
ma
ay nott be
b currently
tl known,
k
leading to need for estimate
es of
Relevance - Reliability
Text
Reserve Recog
gnition Accounting
An application of present value
v
accounting when ideal
conditions do not exist
SFAS 69 of FASB
This is in footnotes
(additional disclosure), not Proved: Reasonable (>75%) certainty
BS.
that under the current economic, operating
and regulatory conditions, that the reserve
will be able to generate FCFs
A li tto proved
Applies
d reservves only
l
Discounted at mandated
d rate of 10%
Revenue recognized as reserves are proved
Uses oil & gas prices ass at end of period
- Not when expected to be sold
Management critiques of SFAS
S
69?
I li ti
Implications
off thi
this ffor acccountants
t t
Accountants are not ne
eeded if true net income does
exist
Judgement is required to
t estimate net income
In other words, accountants are needed to estimate net income.
Group Questions
Q