Time Value of Money and Fair Value Accounting. Dr Jae K. Shim

Table 2: The Future Value of an Ordinary Annuity of $1.00

       Table 3: The Present Value of $1.00

       Table 4: The Present Value of an Ordinary Annuity of $1.00

       Table 5: The Present Value of an Annuity Due of $1.00

       Table 6: Monthly Installment Loan Payment

       Table 7: Normal Distribution Table

       Appendix II: Excel Financial Functions

       Appendix III: Annual Reports - Sample Fair Value Disclosures

       Marathon Oil 2011 Annual Report

       15. Fair Value Measurements

       Fair Values – Recurring

       Fair Values – Nonrecurring

       Fair Values – Financial Instruments

       Walt Disney Co. 2010 Annual Report

       16. Fair Value Measurement

       Fair Value of Financial Instruments

       Transfers of Financial

       Assets Credit Concentrations

       Marathon Oil 2008 Annual Report

       17. Fair Value Measurements

       Textron2008 Annual Report

       Note 10. Fair Values of Assets and Liabilities

       Assets and Liabilities Recorded at Fair Value on a Recurring Basis

       Glossary

       Index

       Preface

      Fair values are more common in financial reports because fair values have increased in business importance in recent years. Increasingly elaborate financial instruments and risk management practices have created financial statement elements for which historical cost is almost irrelevant, and fair value, and fluctuations in fair value, are extremely relevant.

      According to the FASB’s recent guidance on fair value measurements ASC820-10-5 (FAS-157, Fair Value Measurements), Level 3 hierarchy accepts fair values estimates based on present value of expected future cash flows. Furthermore, CPAs must have a working knowledge of the time value of money (future value and present value concepts) because of their application to numerous types of business events and transactions which require proper valuation and presentation.

      Time value of money is also a critical consideration in financial and investment decisions. For example, compound interest calculations are needed to determine future sums of money resulting from an investment. Discounting is used to evaluate the future cash flow associated with capital budgeting projects. This book aims at presenting the time value tools and techniques that are necessary for fair value measurements and for various financial decision making. Furthermore, this book is a comprehensive survey of fair value accounting with a discussion of : (1) ASC 820, Fair Value Measurements and Disclosures, (2) A list of the financial statement items for which fair value reporting is required or allowed. (3) A variety of valuation models, and (4) Fair value disclosure requirements.

       About the Author

      Dr. Jae K. Shim is a professor of business at California State University, Long Beach and CEO of Delta Consulting Company, a financial consulting and training firm. Dr. Shim received his M.B.A. and Ph.D. degrees from the University of California at Berkeley (Haas School of Business). Dr. Shim has been a consultant to commercial and nonprofit organizations for over 30 years.

      Dr. Shim has over 50 college and professional books to his credit, including Barron’s Dictionary of Accounting Terms, Budgeting Basics and Beyond, 2011-2012 Corporate Controller’s Handbook of Financial Management, US Master Finance Guide 2012-2013, Project Management, Dictionary of Business Terms, The Complete CPA Reference (formerly The Vest-Pocket CPA), CFO Fundamentals (formerly The Vest-Pocket CFO), and the best-selling Vest-Pocket MBA.

      Thirty-one of his publications have been translated into foreign languages such as Chinese, Spanish, Russian, Polish, Croatian, Italian, Japanese, and Korean. Professor Shim’s books have been published by CCH, Barron’s, John Wiley Indonesia, McGraw- Hill, Prentice-Hall, Penguins Portfolio, Thomson Reuters, Global Publishing, American Management Association (Amacom), and the American Institute of CPAs (AICPA).

      Dr. Shim has also published numerous articles in professional and academic journals. He was the recipient of the Financial Management Association International’s 1982 Credit Research Foundation Award for his article on cash flow forecasting and financial modeling.

      Dr. Shim has been frequently quoted by such media as the Los Angeles Times, Orange County Register, Business Start-ups, Personal Finance, and Money Radio. He also provides business content for CPE e-learning providers and for m-learning providers such as iPhone, iPad, iPod Touch, Blackberry, Android, and Window phones.

      He has over 90 online NASBA-compliant CPE courses to his credit.

       CHAPTER 1

       Time value of money and its applications

      A dollar now is worth more than a dollar to be received later. This statement sums up an important principle: money has a time value. The truth of this principle is not that inflation might make the dollar received at a later time worth less in buying power. The reason is that you could invest the dollar now and have more than a dollar at the specified later date.

      Money has value because with it one can acquire assets and services and discharge obligations. The holding, borrowing or lending of money can result in costs or earnings. And the longer the time period involved, the greater the costs or the earnings. The cost or earning of money as a function of time is the time value of money.

      Accountants must have a working knowledge of compound interest, annuities, and present value concepts because of their application to numerous types of business events and transactions which require proper valuation and presentation. These concepts are applied in the following areas: (1) sinking funds, (2) installment contracts, (3) pensions, (4) long-term assets, (5) leases, (6) notes receivable and payable, (7) business combinations, and (8) amortization of premiums and discounts.

      Time value of money is also a critical consideration in financial and investment decisions. For example, compound interest calculations are needed to determine future sums of money resulting from an investment. Discounting, or the calculation of present value, which is inversely related to compounding, is used to evaluate the future cash flow associated with capital budgeting projects. There are plenty of