The Role of Present Value in the Measurement and Recording of Nonmonetary Financial Assets and Liabilities: An Examination

A normative approach is used to explore the feasibility of applying the theory of present value to nonmonetary financial assets and liabilities, in general, and progress billings on long-term construction contracts, in particular. Progress billings on long-term construction contracts represents an application of the discounting process to nonmonetary transactions because it typifies a contractual arrangement that, under GAAP, is not measured in terms of present value, and it extends the FASB's suggestion of potential applications of the discounting process to include product contracts. The analysis uses the weighted average cost of capital (WACC) because this discount rate minimizes the number of assumptions one has to make. Under the WACC formula, the capital asset pricing model can be used to estimate the cost of debt and equity. The proposed discounting procedure has the major benefit of allowing entities to account for progress billings and retained percentages in a manner similar to other receivables and payables with a stated rate of interest different from their market rate.