Three different accounting uncertainties

Accountants adore uncertainty so much they have invented and defined at least three different official versions of it. I found the first one in the Conceptual Framework for Financial Reporting issued by the International Accounting Standards Board called measurement uncertainty. But there are two others.

Measurement uncertainty arises when, to use their pompous words, a monetary amount needs to be estimated. That is simple, but it covers many accounting events in the financial statements. I find it interesting that auditors decided not to use this term. The International Auditing and Assurance Standards Board, acknowledge it on in their Handbook:

“Susceptibility to a lack of precision in measurement is often referred to in accounting frameworks as measurement uncertainty.” [1]

But they dismiss the term out of hand with no explanation why and replace it with their term: estimation uncertainty. Let me show you their two definitions to enable you to measure the significance of their choice:

Measurement uncertainty         Susceptibility to a lack of precision in measurement

Estimation uncertainty                 Susceptibility to an inherent lack of precision in measurement [1]

One extra word: inherent. ‘Inherent lack’ is so much more precise than ‘lack’ on its own and they must consider it critical, but despite four more paragraphs of explanation I cannot understand why. The IAASB do try to help by explaining their meaning of inherent. Here it is:

“The lack of precision in measurement arising from these constraints is inherent because it cannot be eliminated from the measurement process.”

So we are given constraints and measurement process, then to complicate later, they add outcomes or more precisely ‘directly observable outcomes’ and ‘measurement basis’ not to be confused with measurement uncertainty. Clear as mud.

Now would you believe the Board have added two levels of estimation uncertainty: significant estimation uncertainty, high estimation uncertainty? I do not intend to explain the difference between the two nor which is the worst, significant or high!

But I deviate from my initial explanation. Measurement uncertainty is the first official version as defined by the Conceptual Framework for Financial Reporting. The second is existence uncertainty. Or to make it simple:

“In some cases, it is uncertain whether an obligation exists.” [2]

Or whether an asset or liability, or even any accounting vehicle exists.

The third official version is outcome uncertainty which discusses economic benefits that may or may not flow though the accounting systems.

Finally there is this beautiful statement, a beautiful beware statement, telling the reader not to become confused with all these different uncertainties:

“Measurement uncertainty is different from both outcome uncertainty and existence uncertainty …” [3]

So there you are, they are different. (It really exists have a look on page A76).

I then checked to see how the auditors, the IAASB, audit outcome uncertainty and existence uncertainty. They ignore them completely. There is no reference to them in their handbook. In place of outcome uncertainty, they think the phrase ‘outcome of the measurement or evaluation’ is better. For existence uncertainty, they use expressions such as ‘existence and completeness of transactions’ as a substitute.

I guess by changing and ignoring these expressions the IAASB discretely snub the IASB. But I cannot imagine why.

If you discover any more uncertainty definitions please let me know.

[1] International Auditing and Assurance Standards Board, IAASB, Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements, 2021 Edition Volume 1, Page 377.

[2] International Accounting Standards Board, IAS, Conceptual Framework for Financial Reporting, September 2010, revised March 2018, Paragraph 4.35, Page A44.

[3] International Accounting Standards Board, IAS, Conceptual Framework for Financial Reporting, September 2010, revised March 2018, Paragraph 6.61, Page A76.

 [4] “Outcome uncertainty arises when there is uncertainty about the amount or timing of any inflow or outflow of economic benefits that will result from an asset or liability. International Accounting Standards Board, IAS, Conceptual Framework for Financial Reporting, September 2010, revised March 2018, Paragraph 6.61, Page A76.