Time value & modified time value
What is the difference between time value of money and modified time value of money?
Time value of money is the element of interest that provides consideration for only the passage of time. That is, the time value of money element does not provide consideration for other risks or costs associated with holding the financial asset. In order to assess whether the element provides consideration for only the passage of time, an entity applies judgement and considers relevant factors such as the currency in which the financial asset is denominated and the period for which the interest rate is set.
However the time value of money may be imperfect some times. This happens especially when the frequency of the interest rate that is reset periodically does not match the tenor of the interest rate. For example, when three-month LIBOR is used as the interest rate, the interest rate reset should happen every three months. If on the other hand, the interest rate reset happens on a monthly basis, this would result in mismatch between the frequency of the rate reset and the tenor of the instrument.
When such a mismatch occurs, the entity should assess the impact of such mismatch to determine if the contractual cash flows still represent solely payments of principal and interest on the principal amount outstanding. The Standard suggests that where the entity is unable to determine the impact of such mismatch by performing a qualitative assessment, the entity should perform a quantitative assessment of the same.