On Uncertainty Accounting

Author: Lin Bin
Publisher:
Publishing Date: 2000-01-01
Features: As former U.S. Treasury Secretary Rubin once said, "The only certainty is uncertainty." The world is filled with uncertainty. In the field of economics, the study of uncertainty has been most profoundly influenced by the former president of the American Economic Association, Knight. His seminal work, Risk, Uncertainty, and Profit, published in 1921, has had a lasting impact on the study of uncertainty. However, for a long time, research on uncertainty in academia did not receive enough attention. Precisely because of this, Knight's uncertainty economic theory could never gain a foothold in mainstream economics. With the advent of information economics and the awarding of the Nobel Prize in Economics by the Royal Swedish Academy to economists who made outstanding contributions to uncertainty economic theory—such as Arrow (1972), Stigler (1982), Nash-Hausrath, and (1994)—the study of uncertainty has not only been integrated into traditional economics but has also developed rapidly, becoming a focal point of contemporary economic research. Even from the content of classic Western economics textbooks, this shift is evident. For example, in his book Economics (14th Edition), Samuelson dedicates a chapter (Chapter 12) to discussing uncertainty. In the field of accounting, uncertainty has always been a significant issue. As early as 1922, the renowned accountant WA. Paton, in his work Accounting Theory, proposed the concept of "Accounting Postulates." In 1978, the U.S. FASB emphasized that financial accounting should provide information on the amount, timing distribution, and uncertainty of corporate cash flows. In terms of accounting standards, the 11th section of the 1948 British Companies Act was the first to explicitly require the disclosure of the nature and estimated amounts of contingent liabilities that were previously not required. On October 1958, the U.S. CAP officially issued Accounting Standard ARB50, "Contingencies" (Accounting Research Bulletin No. 50, "Contingencies"). In 1975, the FASB issued FAS5, "Accounting for Contingencies" (Financial Accounting Standard No. 5, "Accounting for Contingencies"). Subsequently, Canada (1978), the International Accounting Standards Committee (1978), the United Kingdom (1980), Hong Kong (1980), and Taiwan (1986) all issued accounting standards for contingent events. In the 1990s, influenced by uncertain economic activities such as financial instruments, marketing innovations, environmental matters, restructuring, and impairment events, the international accounting community paid close attention to and valued the treatment of uncertainty in accounting. In 1991, the International Accounting Standards Committee held three consecutive seminars on "Future Events" in Brussels, Norway, and London. sequently, through the efforts of the International Accounting Standards Committee, the U.S., the U.K., Canada, and Australia accounting standards expert groups, a "Future Events" research report was issued in 1994, providing guidance for the development of accounting standards. In 1993, the Canadian Institute of Chartered Accountants (CICA) issued two consultation drafts (EDs): "Contingent Gains and Losses" and "Measurement Uncertainty." In 1994, the AICPA issued SOP946, "Disclosure of Certain Significant Risks and Uncertainties." In 1996, the IASC issued an ED, "Provisions and Contingencies," based on the "Future Events" research report. In September 1998, the MSC issued Standard No. 37, "Provisions, Contingent Liabilities, and Contingent Assets." In recent years, due to increased market competition and risk, how to handle uncertainty in financial accounting has become one of the key concerns of accounting professionals both domestically and internationally. However, systematic discussions on uncertainty in accounting literature are extremely rare! Comrade Lin Bin's research on this issue is challenging, requiring the innovative courage of theoretical breakthroughs. To my knowledge, among those who have conducted specialized research on uncertainty accounting and published academic monographs, Comrade Lin Bin is the first. This monograph has achieved notable success in addressing uncertainty in accounting. The author introduces Western information economics theory into accounting research, attempting to construct a theoretical framework for uncertainty accounting to guide practical applications and the formulation of uncertainty accounting standards. Following the logic of information economics, the author first elaborates on the fundamental meaning of uncertainty, systematically analyzes uncertainty in accounting, and preliminarily constructs a theoretical framework for uncertainty accounting. On this basis, the book divides its research into three parts, studying the accounting treatment of low, medium, and high levels of uncertainty in economic activities. The first part primarily discusses the nature, recognition, measurement, and reporting of low-level uncertainty economic activities, accounting estimates, and several prominent low-level uncertainty accounting economic activities in China. The second part mainly discusses the nature, recognition, measurement, disclosure, probability, accounting for contingent events, and current representative contingent event accounting issues in China. The third part primarily explores the nature, recognition, measurement, disclosure, financial forecasts, and several high-level uncertainty accounting economic activities in China. Each part is interconnected yet independent, with a rigorous structure and clear logic. I believe the monograph has made innovative and breakthrough contributions in the following aspects:
First, applying information economics theory, the author divides uncertainty in accounting into endogenous uncertainty and exogenous uncertainty.
Second, the author summarizes four characteristics of uncertainty accounting: the focus on future-oriented accounting objects, the extensive use of estimation and judgment methods in recognition and measurement, the general adoption of fair value as the measurement attribute, and diversified disclosure methods.
Third, considering the characteristics of uncertainty, the author argues that the guidance for handling uncertain business should be based on the existing accounting conceptual framework, with truthfulness and fairness as the guiding principle, reliability, relevance, conservatism, and full disclosure as the core, the accrual basis as the recognition basis, and materiality and neutrality as the principles for estimation, measurement, and judgment.
Fourth, the author divides uncertainty into high, medium, and low levels to explore related economic activities and their treatment, which is a creative insight in this book.
Fifth, the book pays close attention to China's practical situation. Regardless of the level of uncertainty, the book proposes relevant low, medium, and high uncertainty accounting issues in China in general discussions, which is both commendable and practically significant.
This monograph is based on the author's doctoral dissertation, revised and expanded. Grounded in international practices and closely aligned with China's realities, it employs a combination of theoretical analysis and case studies to systematically research uncertainty accounting. The research is cutting-edge, and the viewpoints are forward-looking. In summary, I believe this monograph holds significant importance for reducing uncertainty in accounting, advancing the development of accounting disciplines and uncertainty accounting theory, improving the construction of uncertainty accounting standards, and refining uncertainty accounting practices. Especially, the many constructive suggestions proposed by the author, based on the integration of theory and practice and grounded in China's actual conditions, hold valuable reference for the formulation of Chinese accounting standards.
The issue of uncertainty in accounting remains unresolved in the accounting field. Therefore, some topics in this book may be controversial, and others may require further exploration by the author. However, focusing on uncertainty and discussing its accounting treatment, supported by specific cases and elevated to a theoretical level, demonstrates the book's innovative approach and courageous exploration, making it a groundbreaking and well-crafted accounting monograph.
Ge Jiashu
January 1, 2000
Excerpt:
III. Uncertainty Accounting
Although accounting is fraught with uncertainty, and this uncertainty cannot be eliminated or reduced at present, as a science, it is far from perfect. This does not mean that accounting has no other path but to develop in the direction of art. In fact, accounting is gradually reducing this uncertainty in its development, and the history of financial accounting is a history of its struggle against uncertainty. This can be seen from the following aspects:
(1) In 1494, the father of modern accounting, Pacioli, invented the double-entry bookkeeping system. Due to the scientific nature of its double-entry balancing principle, compared to single-entry bookkeeping, it effectively reduced the uncertainty of financial accounting information.
(2) Accounting assumptions, general accounting principles, accounting elements, and accounting objectives—basic concepts of financial accounting—although uncertain themselves, greatly reduce the uncertainty in the confirmation, measurement, and reporting of financial accounting information. Without the going concern assumption, if accounting were always in a liquidation state, data would be too uncertain to handle. For example, without the accounting entity assumption, the lack of clear spatial boundaries for accounting would make it impossible to conduct accounting work. Therefore, in this sense, without these basic concepts, there would be no financial accounting.
(3) As one of the hallmarks of modern accounting, the U.S. "Generally Accepted Accounting Principles" (GAAP), which emerged in the 1930s, greatly reduced the "artistic" (uncertainty) components of accountants' information processing, thereby significantly enhancing the certainty of accounting information.
(4) The financial accounting conceptual framework, which emerged in the 1970s and 1980s (represented primarily by the U.S.), serves as the "constitution" and "quasi-theory" of accounting, primarily guiding the formulation and revision of accounting standards. Accounting standards formulated or revised according to a consistent and logically rigorous conceptual framework can effectively reduce the uncertainty of financial accounting standards (e.g., contradictions between standards, or standards that introduce uncertainty due to excessive alternative solutions). According to the 1992 U.S. AICPA Statement of Position No. 69, the conceptual framework can serve as a higher-level GAAP, directly guiding economic activities without specific guidelines, thereby directly reducing uncertainty in the information processing process.
(5) Auditing, as the "reprocessing" of accounting information (primarily referring to CPA audits), also reduces the uncertainty of accounting information to a certain extent.
(6) Research findings on conceptual frameworks for financial instruments and future events, as well as studies directly targeting uncertainty in accounting standards formulation, accounting model selection, and accounting personnel behavior based on information economics, will inevitably have a profound impact on reducing accounting uncertainty.
Broadly speaking, any method, measure, or theory that reduces the uncertainty of the accounting information system (as described in the six aspects above) can be included in the scope of uncertainty accounting research. From a macro perspective, the current financial accounting could also be considered a form of uncertainty accounting if studied from the angle of uncertainty. This is a broad definition of uncertainty accounting, which can be expressed in English as "Uncertainty Accounting," referring to the study of uncertainty in financial accounting with the goal of eliminating it. The research presented in this paper is only one aspect of this vast system, primarily focusing on the accounting treatment of uncertain economic activities, which can be termed "Accounting for Uncertain Economic Events" in English.
Postscript: This book is based on my doctoral dissertation of 1997, revised and expanded. The direct reasons for choosing this topic for my doctoral dissertation were two: First, a conversation with my supervisor, though the specifics are unclear, I remember my supervisor mentioning that "uncertainty" is a major challenge in accounting, and research in this area is highly meaningful. Second, during a period, I was deeply interested in natural sciences, particularly thermodynamics, entropy, fuzzy mathematics, and chaos theory. Initially, I planned to explore accounting uncertainty from the perspective of natural sciences, especially from a mathematical viewpoint. With this in mind, I began writing my dissertation with the intention of solving a major problem. However, after a period of knowledge "recharging" and reflection, I realized I was too naive and overestimated my capabilities. The writing of the dissertation nearly reached a dead end. Later, with my supervisor's guidance and encouragement, I turned to information economics and primarily focused on financial accounting to study uncertainty in accounting, which turned the tide and led to the completion of the dissertation. Therefore, if this book has any merit, it first and foremost belongs to my mentor—Professor Ge Jiashu. Due to the limited materials and the challenging nature of this innovative research, coupled with my own laziness and lack of academic diligence, there are bound to be numerous uncertainties and even errors in this book. I sincerely welcome any constructive criticism from the readers.
At the final completion of this manuscript, my thoughts returned to Xiamen University, the place that has always haunted me. The fresh air, gentle sea breeze, fiery, brilliant, and Lingyun Tower, with its panoramic view of the mountains and sea, as well as the melodious bell chimes of Nanputuo Temple in the twilight—all are so familiar and cherished. Of course, what is even more unforgettable are my teachers, classmates, and the humanistic spirit of "Striving for Perfection" at Xiamen University. In 1994, I entered Xiamen University and had the privilege of becoming a disciple of the distinguished accounting master, Professor Ge Jiashu. Professor Ge, whom I have long admired as an accounting master, taught me with great dedication over three years. His mentorship, teaching, and guidance have benefited me immensely and will remain unforgettable and deeply appreciated. His rigorous self-discipline in academic pursuits and his relentless dedication to research, even at the age of nearly eighty, deeply inspire his disciples and motivate me to strive forward. Additionally, over the past three years, Professor Ni Jing'an, my mentor's wife, has shown me motherly care in my daily life, for which I am also deeply grateful. The Xiamen University School of Accounting is home to a group of renowned professors, including Professor Yu Xuying, Professor Chang Xun, Professor Wu Shuipeng, Professor Qu Xiaohui, Professor Chen Shouwen, Professor Huang Shizhong, and Professor Tang Yuhua, each with profound expertise in their respective fields. Being immersed in such an academic atmosphere and frequently learning from their teachings has benefited me greatly. Especially Professor Chang Xun, during the "Fourth International Accounting and International Taxation Assistant Training Program" organized by the School of Economics at Xiamen University in 1990, he taught us three courses. Professor Chang's extensive knowledge, exquisite teaching skills, open-mindedness, and willingness to help others are models for teachers. From him, I have learned not only professional knowledge but also how to be a teacher and a person. The completion of this book is inseparable from the help and care of many predecessors, teachers, classmates, and colleagues. I extend my heartfelt gratitude to them. They have nurtured me for many years and have always been concerned about my academic pursuits. Professor Qiu Zongshun, who has supported me for many years and provided valuable suggestions for my doctoral dissertation, Professor Guo Daoyang and Professor Wang Songnian, who offered guidance and brought highly valuable foreign reference materials from the U.S., Professor Huang Shizhong, who has always been me, my senior brothers Professor Liu Feng and Professor Chen Shaohua, Professor Xia Donglin, Professor Yang Youhong, and Doctor Zhu Hailin, who provided valuable materials for my dissertation. At the doctoral seminar led by Professor Ge, Dr. Chen Jian Shen, Dr. Fang Rongyi, Dr. Li Shaobo, Dr. Li Jianfa, Dr. Liu Zongliu, Dr. Deng Chuanzhou, Dr. Chen Guang, Dr. Sang Shijun, Dr. Xiang Youzhi, Dr. Ren Yongping, and Dr. Liu Jie, who all offered constructive suggestions for my dissertation, are also sincerely thanked. The publication of this book was supported by the former Dean of the School of Management at Sun Yat-sen University, Professor Gu Bao'an, the current Dean, Professor Wei Minghai, and the Vice Dean, Professor Tan Jingsong. Mr. Guo Zhaoxu of the Accounting Editorial Department at the China Financial and Economic Publishing House has also been concerned about the publication of this book. My heartfelt gratitude goes to them.
Finally, I want to thank my parents, my uncle, and my ninety-year-old grandmother. Over the past decades, they have worried too much about me. As the saying goes, "Parents are at home, children do not travel far." Due to my long-term study and work away from home, I have neglected taking care of my family, which is a failure as a child. I dedicate this book to my dear family.
Lin Bin
August 8, 1997 (first draft) at Room 703 of Lingyun Building, Xiamen University
November 28, 1999 (final draft) at the School of Management, Sun Yat-sen University