Present Value with the Restriction of Cost: [Form 1], [Form 2] and [Form 3]

2330 downward at the end of the second and third periods due to lowered profitability, as 90 and 70 respectively.  Fair value of the equipment was 120 at the end of the first period. If market participants estimate fair value of the equipment, they would predict net cash inflow from its asset at the end of the second and third periods, as 72 and 62 respectively Discount rate is 8. Figure 4 shows the calculation result and graph of the prospective method and the catch-up method, which have been the two main methods for impairment of a loan. F i g u r e 4 Prospective Method a n d Catch-up Method T i m e Re a l i z e d CI F Prospective Method 1 Catch-up Method 2 Ca r r yi n g a m o u n t A m o r t i za t i o n I n c o m e Ca r r yi n g a m o u n t A m o r t i za t i o n I n c o m e 1 2 3 - - - 130 90 70 3 0 0 1 6 0 7 0 - - - - - - 1 4 0 9 0 70 - - △ 10 - -- 0 0 ％ 0 0 ％ 3 0 0 1 4 0 6 4 - - - - - - 1 6 0 7 6 64 - - △ 30 - -- - - 14 10 ％ 6 10 ％ T o t a l s 2 9 0 - - - 3 0 0 △ 10 - - - 3 0 0 △ 10 Notes In the parentheses, the rate of return are shown. Impairment loss is included in amortization. 1 ・Here, a zero rate is applied, because the revised rate r that fills the following formula is neg ative. 300 = 130 1+r - 1 + 90 1+r - 2 + 70 1+r - 3 ・Impairment loss 10 =300-290 is included in amortization 140. ・In the 2nd period, it is calculated as follows. 1 Modified Carrying amount at the Impairment: 90 + 70 = 160 2 Carrying amount at the end: 70 3 Amortization difference between 1 and 2: 160 - 70 = 90 4 Income realized CIF - amortization: 90 - 90 = 0 2 ・Here, the revised balance is calculated with a discount rate 10％ as follows. 130 1+0.1 - 1 + 90 1+0.1 - 2 + 70 1+0.1 - 3 = 245 ・Impairment loss 55 =300-245 is included in amortization 160. 2331 ・In the 2nd period, it is calculated as follows. Consistent with cost -allocation basis 1 Modified Carrying amount at the Impairment: 90 1+0.1 - 1 + 70 1+0.1 - 2 =140 2 Carrying amount at the end: 70 1+0.1 - 1 = 64 3 Amortization difference between 1 and 2: 140 - 64 = 76 4 Income realized CIF - amortization: 90 - 76 = 14 Consistent with profit -allocation basis 1 Income Modified Carrying amount × 10: 140×10 ％ = 14 2 Amortization realized CIF - income: 90 - 14 = 76 In FAS No.144 FASB 2001, IAS No.36 IASB 2004b and Japanese GAAP BADC 2002. Hereinafter abbreviated as J-GAAP, the market value approach with the restriction of cost [Form 3] is applied to long-lived assets. Form 3 includes two models. The fair value model in U.S.GAAP gives weight on the assumption of market participants, while the value in use model in IFRS and J - GAAP put much faith into company itself or management intents. Figure 5 shows the calculation results and graph of the fair value model and Value in Use model. 2332 F i g u r e 5 F a i r V a l u e M o d el a n d Value in Use Model T i m e Re a l i z e d CI F Fair Value Model 1 Value in Use Model 2 Ca r r yi n g a m o u n t A m o r t i za t i o n I n c o m e Ca r r yi n g a m o u n t A m o r t i za t i o n I n c o m e 1 2 3 - - - 130 90 70 3 0 0 1 2 0 5 7 - - - - - - 1 8 0 6 3 57 - - △ 50 - -- - - 27 23％ 13 23％ 3 0 0 1 4 0 6 4 - - - - - - 1 6 0 7 6 64 - - △ 30 - -- - - 14 10％ 6 10％ T o t a l s 2 9 0 - - - 3 0 0 △ 10 2 1 - - - 3 0 0 △ 10 2 1 Notes In the parentheses, the rate of return are shown. Impairment loss is included in amortization. 1 ・Here, impairment loss 80 =200 -120 is included in amortization 180 at the 1st period. ・In the 2nd period, it is calculated as follows. Consistent with cost -allocation basis 1 Modified Carrying amount at the Impairment: 721+0.08 - 1 + 621+0.08 - 2 = 120 2 Carrying amount at the end: 621+0.08 - 1 = 57 3 Amortization difference between 1 and 2: 120 - 57 = 63 4 Income realized CIF - amortization: 90 - 62 = 27 Consistent with profit -allocation basis 1 Income Modified Carrying amount × βγ: 1β0×βγ％ = 27 2 Amortization realized CIF - income: 90 - 27 = 63 2 ・Here, impairment loss 60 =200 -140 is included in amortization 160 at the 1st period. ・In the 2nd period, it is calculated as follows. Consistent with cost -allocation basis 1 Modified Carrying amount at the Impairment: 901+0.1 - 1 + 701+0.1 - 2 = 140 2 Carrying amount at the end: 70 1+0.1 - 1 = 64 3 Amortization difference between 1 and 2: 140 - 64 = 76 4 Income realized CIF - amortization: 90 - 76 = 14 Consistent with profit-allocation basis 1 Income Modified Carrying amount × 10: 140×10％ = 14 2 Amortization realized CIF - income: 90 - 14 = 76 There is no difference among the prospective method, the catch-up method, the fair value model and value in use model in that cost is set as a restriction. However, the underlying concept of income measurement differ each other. 2333 First, the prospective method responds by adjustment of interest rate in Example 2, interest rate is reduced from 10 to 0 when estimation changes due to lowered profitability. It intends the ex post income measurement like ―recapture of the book value‖. Therefore, only part of the book value that cannot be expected to be recaptured 10 is recognized as impairment loss. It belongs to the cost allocation approach [Form 1]. Although Long-lived assets are assumed in Example 2, the same argument can be made with a loan. FAS No.15 FASB 1977, which described impairment for a loan, once adopted the prospective method. Second, the catch-up method responds with immediate adjustment of balance when estimation changes. It intends the income measurement like ‗recapture of the book value with normal return ‘. In Example 2, a normal return 10 is set out first 2nd period 14 and 3rd period 6, before impairment loss 55 is determined. It belongs to the cost allocation approach [Form 1], because the cost basis and effective interest rate is applied. It also belongs to the profit allocation approach [Form 2], because a reasonable future return is set out and impairment loss is 2334 subordinate to it. Therefore it has both aspects of Form 1 and Form 2. At present, a predominant approach of impairment for a loan is the catch-up method which is adopted by FAS No.114 FASB 1993a , IAS No.39 IASB 2004c and J-GAAP JICPA 2005. Finally, as to market value approach with the restriction of cost [Form 3], there are two models within this approach. In the value in use model which is applied in IAS No.36 IASB 2004b and J-GAAP BADC 2002, income measurement like ‗recapture of the book value with the normal return‘ is intended. Therefore, a reasonable return 10 is set out first 2nd period 14 and 3rd period 6 and then impairment loss 60 is determined. A lthough the timing of recognition is different, as long as the normal return is unchanged, the calculation result of the catch-up method is same as the value in use model. The difference between value in use 140 and fair value 120 at the impairment recognition means self-generating internal goodwill. The fair value model accounts for excessive loss at the time of impairment recognition compared to the value in use model, while it accounts for not only normal return 2nd year 14, 2335 3rd year 6 but also excessive return the realized part of self-generating goodwill 20; 2nd year 13, 3rd year 7 in the subsequent p eriods. After all, the fair value model which is applied in FAS No.144 FASB 2001, income mea surement like ‗the recapture of the book value with the market return normal plusminus excess return ‘, the level of which is naturally expected in the capital market, is intended. Figure 6 summarizes the above mentioned pints. Figure 6 Summaries of Present Value Methods Notes ・ Internal: Discipline based on the assumption of company itself ・ External: Discipline based on the assumption of market participants ・ Flow: Income is calculated by the difference between revenue and expense consistent with revenue and expense view ・ Stock: Income is calculated by the difference in net assets consistent with asset and liability view ・ 1, 2: Impairment of a loan 3, 4: Impairment of long -lived assets 5: Trading securities ・ ASBJ: Accounting Standards Board of Japan JICPA: Japan Institute of Certified Public Accountants

5. Two Significant Boundaries Characterizing Various Forms

Figure 6 has two significant boundaries. One is between Flow and Stock and the other is between Internal and External. The meanings of two boundaries are as follows. 2336 Firstly, the Boundary α dividing Flow and Stock focuses on the difference between prospective method [Form 1] with the characteristics of flow and catch - up method [Form 2] with the characteristics of stock as well as flow. Main difference is whether an economic profit-making opportunity is built in its income calculation system or not. In catch-up method, normal economic opportunity for the company is assumed since recapture of the book value with normal return is intended. This is the reason for immediate adjustment of stock, if profitability falls as compared to normal economic opportunities. Such a premise is also applicable to the value in use model. Instead of normal return, FASB 1990 This Paper Error Boundaries Examples of Application α β Allocation Basis Cost Allocation approach ［Form 1］ Prospectiv e Approach Flow Internal 1 FAS15 FASB, 1977 Profit allocation approach ［Form 2］ Catch-up Approach S t o c k + F l o w 2 FAS114 FASB, 1993a IAS39 IASB, 2004c JICPA 2005 Revaluatio n Basis Market Value Approach with the Restriction of Cost ［Form 3］ Value in Use Model 3 IAS36 IASB, 2006b BADC 2002 Fair Value Model Externa l 4 FAS144 FASB, 2001 Fair Value approach ［Form 4］ Reflected constantly Stock 5 FAS115 FASB, 1993b IAS39 IASB, 2004c ASBJ 2006a