Abstract ABSTRACT: Much of the accounting literature supports the use of the present value of an enterprise's future cash flows as the "ideal" valuation basis for external accounting reports. This article argues that this model can serve as an ideal valuation base only under fairly restrictive conditions. Using the familiar consumer surplus analysis of economic theory, it is shown that investors will generally value differently any given security and therefore a single present value valuation made by enterprise management cannot serve all investors under all circumstances. This suggests that efforts to improve financial accounting reports should be addressed to disclosing, not the present value valuations themselves, but rather the fundamental variables that underlie such present value calculations. Not withstanding these findings, it is further shown that present value valuations are useful in the important case where the assumptions of the portfolio and capital market theories apply. The article concludes by considering several arguments that have been put forward favouring the use of present value valuations in accounting reports and finds that none have general validity.
Michael Bromwich (Fri,) studied this question.