Accounting for Uncertainty

Abstract

Abstract In accordance with the theme of the Yuri Ijiri lectures, I focus on something foundational to accounting: the communication of uncertainty through accounting numbers. I do so in the context of providing information to investors about “the amount, timing, and uncertainty of future cash flows”, an objective of accounting standard setters (with emphasis added). I outline accounting principles that convey uncertainty and discuss the implications for a financial statement analysis that extracts information about uncertainty. I also show how accounting-based valuation is modified to incorporate that information. Asset pricing in finance deals with risk and uses accounting numbers to do so. I explain how that endeavor might be improved by recognizing the accounting for uncertainty. That puts accounting and finance on the same platform. Finally, I address normative issues of accounting policy for conveying information about the uncertainty of future cash flows.