AccountingStudent resources

How is Present Value Related to the Concept of a Liability?

Concept of a liability

IAS 37 (para.42) requires that, the risks and uncertainties surrounding the events and circumstances should be taken into account in reaching the best estimate of a provision.

IAS 37 requires provisions to be discounted to present value where the effect of discounting is material (paragraph 45). The discount rate used must be a pre-tax rate that reflects the time value of money and the risks specific to the liability.

To avoid double-counting, where the estimates of future cash flows have been adjusted for risk then the discount rate should not also reflect the particular risk (paragraph 47). In practical terms it is often difficult to determine reliably a liability-specific discount rate. Usually entities use a rate available for a liability with similar terms and conditions or, if a similar liability is not available, a risk-free rate for a liability with the same term (for example a government bond with a five-year term may be used as the basis for a company’s specific liability with a five-year term) and this rate is then adjusted for the risks pertaining to Concept of a liability in question.

Tags
Show More

Related Articles

Back to top button
Close

Adblock Detected

Please consider supporting us by disabling your ad blocker