Outcome uncertainty is uncertainty about the amount or timing of any inflow or outflow of economic benefits that will ultimately result from an asset or liability.
“Uncertainty” in accounting refers to the difficulty of predicting outcomes because of limited or inexact knowledge. Financial statements often contain estimates and other information based on uncontrollable events that can impact future financial reporting and transactions. 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. Outcome uncertainty
Companies cannot control all of the variables that affect future outcomes, such as decisions made by government agencies. Companies often use different methods to recognize and record uncertainty. For instance, the method used to adjust estimated fair market value can affect cash flow and the overall value of a company. A company might selectively provide disclosure documents about uncertainty around its ability to survive but choose not to reflect that uncertainty in its financial statements. Companies tend to offer subjective assessments of uncertainty and related predictions. A high or complex level of uncertainty often requires the use of financial experts to verify and objectively assess the existence and impact of uncertainties.
Concerns about uncertainty often involve financial statements and the integrity of the information provided. Generally accepted accounting principles, such as those prepared by the IASB, provide standard processes for recognizing, recording and disclosing uncertainty. Consistent use of standard accounting practices for uncertainty increases comparability of financial statements from different reporting periods and from different companies. For instance, IFRS standards prescribe the process for determining fair market value of assets, including disclosure of measurement criteria and inclusion of observable criteria for value estimates. Outcome uncertainty
Increases in uncertainty
As the level of uncertainty increases, challenges may exist for: Outcome uncertainty
- financial statement preparers to estimate the future outcome of the uncertainties inherent in many business transactions, Outcome uncertainty
- auditors to verify the subjective judgments about those uncertainties, and Outcome uncertainty
- investors to understand those uncertainties and assess their potential impact on future earnings or cash flows. Outcome 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.
This roundtable will bring together investors, preparers, and auditors to provide input about those measurements (and associated disclosures) where the outcome depends on future events that by definition are presently unknown. As the initial step in gathering input on this topic, the roundtable discussion will focus on:
- 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.
- Auditability — the auditor’s role and responsibility for reporting on financial statements with measurement uncertainties.
Examples of current disclosures of uncertainty
Here are some illustrations of 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, intangibles) are only adjusted down when the recorded amount is greater than the fair value at a point in time.
- 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.
- Certain guarantees are measured based on probability-weighted expected future outcomes.
- 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.
- 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.
- 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.
See also: The Conceptual Framework 2018
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