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Moving the Conceptual Framework Forward: Accounting for Uncertainty

Author

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  • Richard Barker
  • Stephen Penman
  • Thomas J. Linsmeier
  • Stephen Cooper

Abstract

To meet the objectives of financial reporting in the IASB's Conceptual Framework, the “balance‐sheet approach” embraced by the Framework is necessary but not sufficient. Critical, but largely overlooked, is the role of uncertainty, which we argue defines the role of accrual accounting as a distinctive source of information for investors when investment outcomes are uncertain. This role is in some sense paradoxical: on the one hand, uncertainty undermines both the balance sheet (because uncertain assets are unrecognized) and the income statement (because mismatching is unavoidable). However, these inevitable accounting effects can be exploited to provide information about uncertainty, though not by a balance‐sheet approach alone. Rather, balance sheet recognition and measurement criteria are established by consideration of the impact of uncertainty on matching and mismatching in the income statement. This combination of balance‐sheet and income‐statement approaches enhances the communication of information to investors under conditions of uncertainty, thereby giving greater clarity and purpose in satisfying the objective of the Framework to provide information about “the amount, timing, and uncertainty of future cash flows.” Contribuer à la progression du Cadre conceptuel : la comptabilisation de l'incertitude Pour que soient atteints les objectifs d'information financière du Cadre conceptuel de l'International Accounting Standards Board, l'approche bilantielle préconisée, quoique nécessaire, ne suffit pas. L'importance de l'incertitude, si déterminante soit‐elle, n'en est pas moins largement négligée, ce qui, de l'avis des auteurs, fait de la comptabilité d'exercice une source distinctive de renseignements pour les investisseurs lorsque le rendement des placements est incertain. Ce rôle informatif est, dans un sens, paradoxal: l'incertitude compromet à la fois le bilan (les actifs incertains n’étant pas comptabilisés) et les résultats (étant donné les immanquables erreurs de concordance). Il est toutefois possible de tirer parti de ces répercussions comptables inévitables de manière à produire de l'information quant à l'incertitude, bien que l'approche bilantielle ne le permette pas à elle seule. Les critères de comptabilisation au bilan et d’évaluation sont plutôt établis compte tenu de l'incidence de l'incertitude sur la concordance et la non‐concordance dans l’état des résultats. Cette conjugaison de l'approche bilantielle et de l'approche axée sur le résultat améliore l'information communiquée aux investisseurs en situation d'incertitude, ce qui lui confère plus de clarté et d'utilité dans l'atteinte de l'objectif du Cadre conceptuel de fournir de l'information au sujet « des montants, du calendrier et du degré d'incertitude des flux de trésorerie futurs ».

Suggested Citation

  • Richard Barker & Stephen Penman & Thomas J. Linsmeier & Stephen Cooper, 2020. "Moving the Conceptual Framework Forward: Accounting for Uncertainty," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 322-357, March.
  • Handle: RePEc:wly:coacre:v:37:y:2020:i:1:p:322-357
    DOI: 10.1111/1911-3846.12585
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    Cited by:

    1. Rolf Uwe Fülbier & Thorsten Sellhorn, 2023. "Understanding and improving the language of business: How accounting and corporate reporting research can better serve business and society," Journal of Business Economics, Springer, vol. 93(6), pages 1089-1124, August.
    2. Dinh, Tami & Schultze, Wolfgang, 2022. "Accounting for R&D on the income statement? Evidence on non-discretionary vs. discretionary R&D capitalization under IFRS in Germany," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 46(C).
    3. Zhang, Ying & Andrew, Jane, 2022. "Financialisation and the Conceptual Framework: An update," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 88(C).
    4. Matthias Breuer & Harm H. Schütt, 2023. "Accounting for uncertainty: an application of Bayesian methods to accruals models," Review of Accounting Studies, Springer, vol. 28(2), pages 726-768, June.
    5. Anup Srivastava, 2023. "Trivialization of the bottom line and losing relevance of losses," Review of Accounting Studies, Springer, vol. 28(3), pages 1190-1208, September.
    6. Tatiana Garanina & Henri Hussinki & Johannes Dumay, 2021. "Accounting for intangibles and intellectual capital: a literature review from 2000 to 2020," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5111-5140, December.
    7. Stephen Penman, 2023. "Accounting for Intangible Assets: Thinking It Through," Australian Accounting Review, CPA Australia, vol. 33(1), pages 5-13, March.
    8. Yasmine Chahed, 2021. "Words and Numbers: Financialization and Accounting Standard‐Setting in the United Kingdom," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 302-337, March.
    9. Kim, Robert & Kim, Sangwan, 2021. "Does revenue-expense matching play a differential role in analysts’ earnings and revenue forecasts?," The British Accounting Review, Elsevier, vol. 53(5).
    10. Kannan, Yezen & Khallaf, Ashraf & Gleason, Kimberly & Bostan, Ibrahim, 2023. "The relationship between R&D intensity, conservatism, and management earnings forecast issuance," Advances in accounting, Elsevier, vol. 62(C).
    11. D’Augusta, Carlo & De Vito, Antonio & Grossetti, Francesco, 2023. "Words and numbers: A disagreement story from post-earnings announcement return and volume patterns," Finance Research Letters, Elsevier, vol. 54(C).

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