• financial statement preparers to estimate the future outcome of the uncertainties inherent in many business transactions, Existence uncertainty
  • auditors to verify the subjective judgements about those uncertainties, and Existence uncertainty
  • investors to understand those uncertainties and assess their potential impact on future earnings or cash flows. Existence uncertainty

For example, seemingly small changes from a management-selected input used to determine fair value could have a material impact on the reported result at any specific date. For example, when a fair value measure is determined primarily based on a discounted cash flow analysis, use of a discount rate that is 100 basis points different could mean the difference between a material goodwill impairment charge, or none at all.

Generally accepted accounting standards provide processes by which uncertainty is factored into financial statements. Accountants recognize some uncertainties as inherent in certain financial transactions. The challenge is to recognize uncertainty and apply the information in ways that reflect a more realistic financial picture of a company. Existence uncertainty

  • Measurement and recognition — whether measurements that involve uncertainty provide investors with useful information.
  • Disclosure — the information that investors find important to understand and assess measurement uncertainties and the challenges or impediments that preparers face in providing that information.

Certain recent accounting standards have potentially increased the extent of measurement uncertainty in financial statements (for example the fair value option in IFRS 9) and some standards have attempted to increase the transparency into the measurement uncertainty that underlies financial statement items (for example IFRS 13 Fair value measurement). Nonetheless, there continue to be questions about the recognition and measurement of uncertainty; the disclosures necessary to understand the measurement uncertainty; and how uncertainty impacts auditability. Existence uncertainty

The IFRS Conceptual Framework for Financial Reporting states, “if the level of uncertainty … is sufficiently large, that estimate will not be particularly useful.” The nature and extent of measurement uncertainty depend on the economic phenomena that the underlying financial statement item is intended to represent. Some question what is the right balance and whether sufficient information is provided to understand the nature and extent of measurement uncertainty. Existence uncertainty

To explore this topic, it may be useful to illustrate some of the various accounting treatments that currently incorporate uncertainty. For example,

  • Certain illiquid financial assets reflected at estimated fair value are adjusted up or down for changes in the estimated fair value; however, non-financial assets (e.g., goodwill) are only adjusted down when the recorded amount is greater than the fair value at a point in time. Existence uncertainty
  • Contingent liabilities are recognized when it is probable that a loss has been incurred and can be reasonably estimated and are measured as a single point estimate. If the single point estimate is within a range, the additional maximum exposure to loss is required to be disclosed. Existence uncertainty
  • Certain guarantees are measured based on probability-weighted expected future outcomes. Existence uncertainty
  • The financial statement effects of uncertain tax positions are recognized when it is more likely than not, based on the technical merits, that the positions will be sustained upon examination and are measured as the largest amount that has more than a 50% chance of being realized. Existence uncertainty
  • Certain illiquid financial assets are measured at present value based on discounted future cash flows regardless of the certainty of those cash flows.
  • Acquired identifiable intangibles are recognized without regard to measurement uncertainty. However, most internally developed intangibles (e.g., research and development and goodwill) are never recognized in the financial statements because the future benefits are deemed to be too uncertain. Existence uncertainty
  • When there is substantial doubt about an entity’s ability to continue as a going concern, the financial statements are generally not adjusted to reflect the uncertainty. Instead, disclosures are provided and include, among other things, information about the uncertainty, the recoverability and classification of recorded asset amounts, and the amounts or classification of liabilities.

Existence uncertainty

Existence uncertainty

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