The components of a present value measurThe components of a present value measurement

The components of a present value measurement

B13 Present value (ie an application of the income approach) is a tool used to link future amounts (eg cash flows or values) to a present amount using a discount rate. A fair value measurement of an asset or a liability using a present value technique captures all the following elements from the perspective of market participants at the measurement date:

(a) an estimate of future cash flows for the asset or liability being measured.

(b) expectations about possible variations in the amount and timing of the cash flows representing the uncertainty inherent in the cash flows.

(c) the time value of money, represented by the rate on risk-free monetary assets that have maturity dates or durations that coincide with the period covered by the cash flows and pose neither uncertainty in timing nor risk of default to the holder (ie a risk-free interest rate).

(d) the price for bearing the uncertainty inherent in the cash flows (ie a risk premium).

(e) other factors that market participants would take into account in the circumstances.

(f) for a liability, the non-performance risk relating to that liability, including the entity’s (ie the obligor’s) own credit risk.