Accounting for Uncertainty

Penman Stephen ()
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Penman Stephen: Columbia University, New York, NY, USA

Accounting, Economics, and Law: A Convivium, 2024, vol. 14, issue 3, 309-327

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.

Keywords: Accounting Risk Information; Accounting and Valuation; Accounting Principles (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/ael-2022-0059

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