Question

Why is discounting unnecessary for current liabilities?

Answer 1

Discounting is unnecessary for current liabilities because of the fact that these liabilities are expected to be paid within a period of one year and hence they are stated at their face amount and not at their present value. Present value of a liability is the present value of the future cash flows required for that liability and in case of current liabilities effect of discounting is immaterial.

In case of current liabilities there is no need to factor in the uncertainties and risks associated with the amount and timing of cash flows. This makes the effect of discounting immaterial in case of current liabilities.

Because the effect of discounting is immaterial in case of current liabilities they are stated at their face amount. As such discounting is unnecessary for current liabilities.