Discounting in the international standard of financial reporting

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Authors: V.I.Troyan, N.E. Lelyuk, O.L. Ilienko


It is demonstrated in the paper that the problem of exact representation of information in financial reporting according to the International Standard of Financial Reporting demands using the theory of money temporal value. To solve this problem the mechanism of discounting is used.


Key words: International Standard of Financial Reporting, financial reporting, discounting



Discounting is an important mechanism that allows having a clear understanding of the organization’s financial state. This is one of the most difficult technical problems that an accountant faces when preparing for reporting due to the International Standard of Financial Report. The Ukrainian accounting does not have similar requirements but the western system of accounting consider discounting as an integral part. In the International Standard of Financial Reporting discounting is able to influence the balance value of any element of accounting and, therefore, to change the financial results of the company’s activities [2].

The importance of discounting can be explained by the fact that the line value of any financial flows can be quite different from their nominal value. According to the theory of money value, equivalent sum paid at different moments has different value due to two reasons:

  1. The risk of not paying off;
  2. The opportunity of alternative investments.

One of the fundamental distinctions of the International Standard of Financial.

Reporting is using the theory of the temporal value of money. It means that the balance should reflect not the nominal but the discounted value of future payments. The theory of temporal value of money proves that money loses its value with time. This fact can be explained by two main factors: inflation and the opportunity to get profit from using money. Therefore, if a company possesses a right to get or a commitment to pay a certain amount of money in future the line value of such asset or commitment is not equal to its nominal value [1].

In order to represent such an element of financial reporting in the balance it is necessary to discount the nominal value of the future payment, i.e. to find its line value. Discounted value is one of the bases for evaluation in the International Standard of Financial Reporting. It is used to reflect in the balance the assets and commitments with the term of paying off more than 12 months after the date of reporting. For short-term periods, the influence of time on the money value is considered inessential and it is not taken into consideration.

An effective interest rate is used for accounting of long-term financial assets and commitments. This rate of discounting counterpoises the balanced value of the assets (or commitment) and the amount of future money revenues (or payments). This rate is used for calculation of the line balance value of the asset (commitment) taking into consideration the future money flows.

From the economic point of view, effective interest rate includes three elements:

  • Stake less rate of profitability, i.e. the rate which the creditors are ready to get in case of absence of risk for non-paying off or inflation;
  • Stake bonus used in case when under real conditions there is a risk of non-payment by the debtor, so the creditors demand higher rates of profitability to compensate possible losses from non-payments;
  • Inflation component that is similar to the stake bonus and increases the rate of profitability to compensate money depreciation [1].

Actually, effective interest value calculation using all the above mentioned elements is not made in practice as it is rather difficult to calculate each of them. Effective interest rate is practically chosen from the existing interest rates depending on the object of accounting. In particular, average market interest rate is used for long-term financial assets and commitments, which are made under similar conditions.

The method of money flows discounting as well as the method of compound interest are the methods of evaluation that take into consideration the change of money value with time. It should be noted that inflation is not the main course for this change. Money value can be changed under the condition of zero inflation in case future profits from investing are calculated as missed profit.

Money flows discounting is used also in situations when there are reasons to doubt as for the correctness of the calculations for the financial assets having delayed payments.

The most important and difficult component of discounting is fixing the rate as there is no right or wrong discounting rate. The discounting rate is different for different companies, for different operations, for different time and tasks. Fixing rate is crucially important for discounting as it significantly influences the calculation results.

Список джерел

  1. 1. Коробейников Д. «Расчет дисконтированной стоимости для целей МСФО» [Електронний ресурс]. – Режим доступу:

2. МСФЗ (IAS) 27 — “Консолідована та окрема фінансова звітність” [Електронний ресурс]. –Режим доступу :

Автор:   @   17 Липень 2015 Коментарі (0)

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