Accounting Theory and Contemporary Issues
ADMS 4510 B

Assignment #3

A discussion of
SFAC # 7 –Present Value of Expected Cash Flows versus Exit Value
As a Proxy for Fair Value

Yolando Robinso

SFAC 7 asserts that present value techniques should be used to estimate fair value and recommends using an expected cash flow approach. Critically discuss the contents of this SFAC and critically compare it to using exit value as the proxy for fair market value.
Statement of Financial Accounting Concepts (SFAC) No. 7 was introduced by Financial Accounting Standards Board (FASB) in February 2000 as an answer to a need. To begin, let us first see what was needed. Traditionally, professionals have used the Historical Model for valuation of assets, both tangible and intangible. However, as the use of present value techniques became more widely used in accounting and financial fields, it raised questions and discussions prompting the introduction of SFAC 7. It is designed to offer guidance on present value techniques in accounting measurements . “It is expected to serve the public interest by providing structure and direction to financial accounting and reporting to facilitate the provision of evenhanded financial and related information that helps promote the efficient allocation of scarce resources in the economy and society, including assisting capital and other markets to function efficiently.” We understand that the public is interested in the amount, timing and uncertainty of future cash flow, which will allow them to come to a consensus affecting the market price, and thereby the efficiency of the market.
So, how does SFAC 7 satisfy these needs? What does it bring to the table of business entities and individuals? SFAC 7 is by no means a replacement of GAAP, but we believe it exits to offer some uniformity in its suggested principles of present value