Theory Accounting Case 8

Topics: Generally Accepted Accounting Principles, Net present value, Balance sheet Pages: 3 (559 words) Published: April 12, 2015
Theory Accounting
Case 8.1

Simon Romario (023121023)
Purwanto Gozali (02312132)
Endah Puspitasari (023121065)

1. The article states that the US standard setter FASB requires companies to record a provision in relation to environmental cost of retiring assets (to reserve environmental liabilities) if its fair value could be reasonably estimated. How do you think companies would go about estimating such a provision? Estimation (or estimating) is the process of finding an estimate, or approximation, which is a value that is usable for some purpose even if input data may be incomplete,uncertain, or unstable. The value is nonetheless usable because it is derived from the best information available. Therefore, amount that will be recognized as a provision should be an amount at the best estimation. Which include not also the cost of an asset when we buy or get them but the cost ( an entity would rationally pay to settle obligation) to transfer it to a third party must be considered also. This means: 1) Provision for one off events (to restructuring, environmental clean-up, settlement of a lawsuit) are measured at the most reasonable amount 2) Provision for large populations of events (warranties, customer refunds) are measured at a probability weighted expected value. It can comes from entity's experience in such transaction (refunds) or also can come from entity expectation about an error or imperfection of their asset 3) Both measurements are at discounted present value using a before tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the liability 2. What aspects of the requirement were used by US companies to defer recognition of a liability? Companies defer their recognition of a liability because the conditional nature of estimating a fair market value by mothballing a contaminated property. The preservation of a production facility without using it to...
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