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I. INTRODUCTION
ES 002 – ENGINEERING ECONOMY

LEARNING OUTCOMES

 At the end of the unit, students will be able to:

1. Explain the time value of money and money discounting at
normal and inflationary conditions
2. Elaborate the role of International Accounting Standards
(IAS) and International Financial Reporting Standards
(IFRS) of IAS
3. Describe the importance of feasibility analysis software
adopting IAS standards

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TIME VALUE OF
MONEY

TIME VALUE OF MONEY

 Time Line
 It is an important tool used in time value analysis.
 It is a graphical representation used to show the timing of cash flows.
 As an illustration, consider the following diagram, where Present
Value (PV) represents Php 100 that is on hand today and Future Value
(FV) is the value that will be in the account on the future date.

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Overview of Money’s Time Value

 Situations that financial managers are tasked to do using

their skill in TVMA:
o Evaluating new project proposals which would entail cash inflow as
well as outflow
o Managing and valuing cash funds like sinking funds and bond
redemption funds, pension funds and employee benefits
o Managing and valuing receivables specifically for banks having long-
term loan receivables handle
o Managing and valuing long-term obligations like bond payable
where refunding a bond issued is concerned.

TIME VALUE OF MONEY (TVM)

o It is the idea that money that is available at the present

time is worth more than the same amount in the future,
due to its potential earning capacity.
o This core principle of finance holds that provided money
can earn interest, any amount of money is worth more the
sooner it is received.
o One of the most fundamental concepts in finance is that
money has a time value attached to it. In simpler terms, it
would be safe to say that a dollar was worth more
yesterday than today and a dollar today is worth more than
a dollar tomorrow.

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Definition of Terms

 COMPOUNDING – the arithmetic process of determining

the final value of a cash flow or series of cash flows when
compound interest is applied.
 DISCOUNTING – the process of finding the present value of
a cash flow or a series of cash flows. It is the reverse of
compounding.
 FUTURE VALUE (FV) – the amount to which a cash flow or
series of cash flows will grow over a given period of time
when compounded at a given interest rate.
 PRESENT VALUE (PV) – the value today of a future cash
flow or series of cash flows.

Definition of Terms

 ANNUITY – is a sequence of periodic payments made at a regular

interval of time in order to pay a loan or create a fund.
 ANNUITY CERTAIN – is an annuity in which payments begin and
end on a definite or fixed date.
 ANNUITY UNCERTAIN – is an annuity whose payment beginning &
termination is indefinite for it is dependent on events that can’t be
determined accurately.
 SIMPLE ANNUITY - payment interval is equal to conversion period.
 GENERAL ANNUITY – payment interval is not equal to conversion
period.
 ORDINARY ANNUITY – is an annuity whose periodic payments are
scheduled at the end of each payment interval

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MONEY DISCOUNTING
AT NORMAL AND
INFLATIONARY
CONDITIONS

What is Discounting?

 It is the process of determining the present value of a payment or a stream

of payments that is to be received in the future.
 Because money is subject to inflation and has the ability to earn interest,
one dollar today is worth more than one dollar tomorrow.
 Discounting, then, is the act of determining how much less tomorrow’s
dollar is worth.
 For example, a bank may loan a sum of money and schedule repayments at
$100 per month for 10 years. The bank may then discount the value of
payments and determine exactly how much (in today's dollars) it will have
received once the loan is paid off.

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How Discounting Works?

 For example, the coupon payments found in a regular bond

are discounted by a certain interest rate and added together with
the discounted par value to determine the bond's current value.
 From a business perspective, an asset has no value unless it can
produce cash flows in the future. Stocks pay dividends. Bonds pay
interest, and projects provide investors with incremental future
cash flows. The value of those future cash flows in today's terms is
calculated by applying a discount factor to future cash flows.
 A higher discount indicates a greater the level of risk associated
with an investment and its future cash flows.

Discounting and Risk

 In general, a higher the discount means that there is a greater the level of
risk associated with an investment and its future cash flows.
 Discounting is the primary factor used in pricing a stream of tomorrow's
cash flows.
 For example, the cash flows of company earnings are discounted back at
the cost of capital in the discounted cash flows model. In other words,
future cash flows are discounted back at a rate equal to the cost of
obtaining the funds required to finance the cash flows.
 A higher interest rate paid on debt also equates with a higher level of risk,
which generates a higher discount and lowers the present value of the
bond. Indeed, junk bonds are sold at a deep discount. Likewise, a higher
the level of risk associated with a particular stock, represented as beta in
the capital asset pricing model, means a higher discount, which lowers
the present value of the stock.

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Discounting & the Time Value of Money

 Borrowing is only worthwhile if the return on the loan exceeds the cost of the
borrowed funds. Lending is only worthwhile if the return is at least equal to that
which can be obtained from alternative opportunities in the same risk class.
 The interest rate received by the lender is made up of:
a. The time value of money: the receipt of money is preferred sooner rather than later.
Money can be used to earn more money. The earlier the money is received, the
greater the potential for increasing wealth. Thus, to forego the use of money, you
must get some compensation.
b. The risk of the capital sum not being repaid. This uncertainty requires a premium as a
hedge against the risk, hence the return must be commensurate with the risk being
undertaken.
c. Inflation: money may lose its purchasing power over time. The lender must be
compensated for the declining spending/purchasing power of money. If the lender
receives no compensation, he/she will be worse off when the loan is repaid than at
the time of lending the money.

INTERNATIONAL
ACCOUNTING
STANDARDS (IAS)

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 International Accounting Standards Committee

 It was formed in 1973 through an agreement made by professional
accountancy bodies from Australia, Canada, France, Germany, Japan,
Mexico, the Netherlands, the United Kingdom and Ireland and the
United States of America.

 International Accounting Standards Committee (IASC)

Foundation
 It was formed in March 2001 as a not-for-profit corporation
incorporated in the State of Delaware, USA.
 It is the parent entity of the International Accounting Standards Board
and independent accounting standard setter based in London, UK.

 International Accounting Standards Board (IASB)

 It is an independent private sector body established in April 1, 2001.
 Its objective is to achieve convergence in the accounting principles
that are used by businesses and other organizations for financial
reporting around the world.
 It assumed accounting standard setting responsibilities from its
predecessor body, the IASC.

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THE NEED FOR INTERNATIONAL

ACCOUNTING STANDARDS
 At present, financial reports prepared for owners or
shareholders and other users involve principles and
procedures that can vary widely from country to country, and
sometimes even within a country.
 Accounting reports will significantly lose credibility if a
company reports different profit numbers in different
countries for given transactions.
 IAS are also of great usefulness for developing countries or
other countries, which do not have a national standard-setting
body or do not have the resources to undertake the full
process of preparing accounting standards.

INTERNATIONAL
FINANCIAL REPORTING
STANDARDS (IFRS) OF
IAS

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 ACCOUNTING STANDARDS - are authoritative statements of how particular

types of transaction and other events should be reflected in financial
statements. Accordingly, compliance with accounting standards will normally
be necessary for the fair presentation of financial statements.

 Are IFRS mandatory?

 A set of financial statements can only be described as complying with
IFRSs if they comply with all existing IFRSs and IFRICs plus all existing
IASs and SICs.
 IASB has no authority to require compliance with its accounting
standards because it is not a government institution, Some countries
give legal backing to IFRSs.
 In short, where IFRS are the required accounting
standards, or an enterprise chooses to comply with IFRS,
the requirements of all IFRS should be regarded as
mandatory.

PHILIPPINE ASC MOVES TO IAS

 The ASC considered the following factors in deciding to move

to International Accounting Standards:
1. Support of IAS by Philippine Organizations
2. Increasing internationalization of business
3. Improvement of IAS
4. Increasing recognition of IASB standards

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IASB’s Conceptual Framework for

Financial Reporting 2010
(IFRS FRAMEWORK)

 It describes the basic concepts that underlie the

preparation and presentation of financial statements for
external users.
 It serves as a guide to the IASB in developing future IFRSs
and as a guide to resolving accounting issues that are not
addressed directly in an IAS or IFRS or Interpretation.

Scope of the IFRS Framework

1. THE OBJECTIVE OF FINANCIAL REPORTING

 Chapter 1 of the IFRS Framework states: The objective of general
purpose financial reporting is to provide financial information about
the reporting entity that is useful to present & potential investors,
lenders and other creditors, who use that information to make
decisions about buying, selling or holding equity or debt instruments
and providing or settling loans or other forms of credit.
 The users utilize financial statements in order to satisfy some of their
different needs for information. They are as follows:
a. Employees
b. Customers
c. Government and their agencies
d. Public

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Scope of the IFRS Framework

2. THE QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

 Financial information is useful when it is relevant and represents faithfully what

it purports to represent. The usefulness of financial information is enhanced if
it is comparable, verifiable, timely and understandable.

1. Relevance – Relevant financial info is capable of making a difference in the

decisions made by users.
a. Financial information has a confirmatory role when it is used to confirm or
correct the decision-maker’s earlier expectations. It is an analysis of the
relationship between predictions and outcomes.
b. Financial information has a predictive role when it is used to make
predictions of, for instance, future cash flows or income.

Scope of the IFRS Framework

2. Faithful Representation. To be useful, financial information must not

only be relevant, it must also
represent faithfully the phenomena it purports to represent.
a. Completeness – A complete depiction includes all information
necessary for a user to understand the phenomenon being depicted,
including all necessary descriptions and explanations.
b. Neutrality – Free from bias.
c. Freedom from Error – No errors or omissions in the description of
the phenomenon and the process used to produce the reported
information has been selected and applied with no errors in the
process.

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Scope of the IFRS Framework

Enhancing Qualitative Characteristics

a. Comparability - Information about a reporting entity is more useful if it
can be compared with similar information about other entities and with
similar information about the same entity for another period or another
date.
b. Verifiability –It means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.
c. Timeliness – It means that information is available to decision-makers in
time to be capable of influencing their decisions.
d. Understandability – Classifying, characterizing and presenting
information clearly and concisely makes it understandable.

Scope of the IFRS Framework

3. THE REPORTING ENTITY

 Cost is a pervasive constraint on the information that can be provided
by general purpose financial reporting. Reporting such information
imposes costs and those costs should be justified by the benefits of
reporting that information.
 The IASB assesses costs and benefits in relation to financial reporting
generally and not solely in relation to individual reporting entities.

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Scope of the IFRS Framework

4. THE DEFINITION, RECOGNITION AND MEASUREMENT OF THE ELEMENTS

FROM WHICH FINANCIAL STATEMENTS ARE CONSTRUCTED
 Going Concern – The IFRS Framework states that the going concern
assumption is an underlying assumption. Thus, the financial statements
presume that an entity will continue in operation indefinitely or, if it that
presumption is not valid, disclosure & different basis of reporting are required.
 Elements of Financial Statements
 Financial statements portray the financial effects of transactions and other events by
grouping them into broad classes according to their economic characteristics.
 Recognition of the Elements of Financial Statements
 Recognition is the process of incorporating in the balance sheet or income statement
an item that meets the definition of an element and satisfies the criteria for
recognition.
 An item that meets the definition of an element should be recognized if:
o It is probable that any future economic benefit associated with the item will flow to or from the enterprise; and
o The item has a cost or value that can be measured with reliability.

Scope of the IFRS Framework

 Measurement of the Elements of Financial Statements

 Measurement is the process of determining the monetary amounts
at which the elements of the financial statements are to be
recognized and carried in the balance sheet and income statement.
 They include the following:
o Historical Cost – Assets are recorded at the amount of cash or
cash equivalents paid or the fair value of the consideration given
to acquire them at the time of their acquisition.
o Current Cost – Assets are carried at the amount of cash or cash
equivalents that would have to be paid if the same or an
equivalent asset was acquired currently. Liabilities are carried at
the undiscounted amount of cash or cash equivalents that would
be required to settle of the obligation currently.

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Scope of the IFRS Framework

o Realizable (Settlement) Value

• Realizable Value – Assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling an
asset in an orderly disposal.
• Settlement Value – Liabilities are carried at the undiscounted
amounts of cash or cash equivalents expected to be paid to
satisfy the liabilities in the normal course of business.
• Present Value – Assets are carried at the present discounted
value of the future net cash inflows that the item is expected to
generate in the normal course of business. Liabilities are carried
at the present discounted value of the future net cash outflows
that are expected to be required to settle the liabilities in the
normal course of business

Scope of the IFRS Framework

5. CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

 Under a financial concept of capital, such as invested money or invested
purchasing power, capital is synonymous with the net assets or equity of the
enterprise. A profit is earned only if the financial (or money) amount of the net
assets at the end of the period exceeds the financial (or money) amount of net
assets at the beginning of the period, after excluding any distributions to and
contributions from owners during the period.
 Under a physical concept of capital, such as operating capability, capital is regarded
as the productive capacity of the enterprise based on, for example, units of output
per day. A profit is earned only if the physical productive capacity (or operating
capability) of the enterprise (or the resources or funds needed to achieve that
capacity) at the end of the period exceeds the physical productive capacity at the
beginning of the period, after excluding any distributions to and contributions from
owners during the period.

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USE OF FEASIBILITY
ANALYSIS SOFTWARE
ADOPTING IAS
STANDARDS

FEASIBILITY STUDY

 Definitions of Feasibility Study

• It is an analysis that takes all of a project's relevant factors into
account—including economic, technical, legal, and scheduling
considerations—to ascertain the likelihood of completing the
project successfully.
• It provides a company's management with crucial information that
could prevent the company from entering blindly
into risky businesses.
• Project managers use feasibility studies to discern the pros and
cons of undertaking a project before they invest a lot of time and
money into it.

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FEASIBILITY STUDY

 Goals of Feasibility Studies

 To understand thoroughly all aspects of a
project, concept, or plan
 To become aware of any potential problems that
could occur while implementing the project
 To determine if, after considering all significant
factors, the project is viable—that is, worth
undertaking.

FEASIBILITY STUDY

 Importance of Feasibility Studies

• Allow a business to address where and how it
will operate
• Identify potential obstacles that may impede its
operations and recognize the amount of funding
it will need to get the business up and running
• Aim for marketing strategies that could help
convince investors or banks that investing in a
particular project or business is a wise choice.

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Steps for a Feasibility Study

1. Conduct a Preliminary Analysis

2. Prepare a Projected Income Statement
3. Conduct a Market Survey, or Perform
Market Research
4. Plan Business Organization and Operations
5. Prepare an Opening Day Balance Sheet
6. Review and Analyze All Data
7. Make a Go/No-Go Decision

FEASIBILITY ANALYSIS SOFTWARE

ADOPTING IAS STANDARDS

 COmputer Model for Feasibility Analysis and Reporting

(COMFAR)
• It facilitates short and long term analysis of financial and
economic consequences for industrial and non-industrial projects.

 BizSight 365 - Financial Accounting Software for Small

Business
• It is BizTechnologies’s entry-level Software-as-a-Service (SaaS)
solution for accounting and manufacturing. Customers in the US
and 13 other countries can attest to this - multi-language English
(US & UK), Spanish, Portuguese, and incudes international
support with VAT, and multi-currency.

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Best Free Accounting Software for Small Business

 Wave
 ZipBooks
 Akaunting
 SlickPie
 GnuCash
 CloudBooks
 Zoho Invoice
 NCH Express Accounts

References

 Printed Sources
 Brigham, Dr. Eugene & Houston, Dr. Joel F. Fundamentals of
Financial Management 13th Edition Cengage Learning Asia Pte Ltd
2016
 Bautista, Leodegario SM. et al Mathematics of Investment 3rd
Edition C&E Publishing, Inc. 2012
 Ballada, Win & Ballada, Susan Basic Accounting Made Easy 2013
Edition DomDane Publshers

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References

 Online Sources
 https://www.economicsdiscussion.net/money/value-of-money-meaning-
measurement-and-preparation-of-index-
numbers/1863#:~:text=it%20can%20purchase.-
,ADVERTISEMENTS%3A,on%20the%20level%20of%20prices.
 http://stec.univ-ovidius.ro/html/anale/ENG/2017-2/Section%20V/19.pdf
 https://psu.instructure.com/courses/1806581/pages/introduction-what-is-time-
value-of-money
 https://www.investopedia.com/terms/f/feasibility-study.asp
 https://www.projectmanager.com/training/how-to-conduct-a-feasibility-study
 https://www.unido.org/resources/publications/publications-type/comfar-
software
 http://www.biztechnologiesonline.com/bizsight365.html
 https://www.fundera.com/business-accounting/free-accounting-software
 https://www.investopedia.com/terms/d/discounting.asp
 https://financial-dictionary.thefreedictionary.com/Discounting

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