Moving the Conceptual Framework Forward: Accounting for Uncertainty

In seeking to meet the objectives of financial reporting stated in the IASB’s Conceptual Framework, the current ‘balance-sheet’ approach is necessary but not sufficient. Critical, but largely overlooked in the Framework, is the role of uncertainty, which we argue defines the role of accrual accounting in providing useful information to investors. 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); yet, on the other hand, the presence of uncertainty gives purpose to accrual accounting, as a distinctive source of information in helping investors to distinguish between the certain and the uncertain, and to thereby embed such information in both stock-based and flow-based valuation. This informational value cannot be realised by application of a balance-sheet approach alone. We argue instead for the application of balance sheet recognition and measurement criteria that are motivated by consideration of subsequent impact on the income statement, which in turn requires conceptualising different categories of matching (and mismatching) in financial reporting. We show that 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 to the Framework in conceptualising decision-useful, accrualbased accounting information.