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As the FASB moves toward more market value measurement, Accounting Principles Board Opinion (APBO) 21, Interest on Receivables and Payable, which suggests a market comparison at the point of exchange is of particular interest.
APBO 21 states in its introduction that "It is not intended to create a new accounting principle." Its primary objective "is to refine the manner of applying existing accounting principles." The nature of the guidance is as follows:
* Typically, it is assumed that a transaction will produce a fair exchange value and if debt is a part of that exchange, it reflects the appropriate time value of money;
* The guidance applies "to receivables and payables which represent contractual rights to receive money or contractual obligations to pay money on fixed or determinable dates, whether or not there is any stated provision for interest" with specified exceptions;
* A hierarchical relationship exists as to choices for valuation, with use of the stated rate unless it is deemed unreasonable, then use of the implied rate of interest by using the fair value of items exchanged and the payment terms of the instrument, and only resorting to an imputed rate when fair values are not determinable as a basis for identifying the implicit rate; and
* The imputed rate will differ across circumstances, which include the credit standing of the issuer, restrictive covenants, the collateral, payment and other terms pertaining to the debt, and the tax consequences to the buyer and seller.
In the words of APB No. 21:
The objective is to approximate the rate which would have resulted if an independent borrower and an independent lender had negotiated a similar transaction under comparable terms and conditions with the option to pay the cash price upon purchase or to give a note for the amount of the purchase which bears the prevailing rate of interest to maturity.
This guidance points a direction for action when debt instruments bear no interest rate and zero coupon bonds and the like become increasingly prevalent in economic transactions. However, short of that situation, the likelihood of the statement being invoked is not clear. For example, how often is other than the stated rate used? In particular, how often is the last resort reached whereby other...