Abstract
Accounting standard setters have long struggled with the development of a conceptual framework to guide rule making on specific issues. The International Accounting Standards Board (IASB) is still engaged. The project to date takes the approach of laying out concepts for the recognition and measurement of assets and liabilities in the balance sheet, with the income statement then falling out as the difference between successive balance sheets. That has drawn criticism from those advocating an “income statement approach” based on revenue recognition and expense matching. It is fair to say the Board is having difficulty reaching closure under the adopted approach.
This paper points to an omission in the Conceptual Framework: Dealing with uncertainty. It shows that the incorporation of uncertainty into the accounting not only gives coherence to the balance sheet approach, but also yields an income statement with appropriate revenue recognition and expense matching. More important, the investor is informed about uncertainty. In short, the paper lays out a combined “balance sheet approach” and “income statement approach” that satisfies the stated objective in the Conceptual Framework of reporting to investors on the amount, timing and uncertainty of future cash flows.
Professor Richard Barker, Saïd Business School, Oxford University and Professor Stephen Penman, Columbia Business School, authored the paper.