The UK’s Financial Reporting Council now expects audit committees to ensure that financial statements are fair, balanced and understandable. Already in July 2012, ACCA, CISI and Long Finance issued a proposal for using distributions, rather than discrete values, to encourage fairer representation of confidence and uncertainty in the figures reported in accounting statements. At the conference 94% agreed there is a need to better represent uncertainty in financial statements.
At the conference a draft guide, called Accounting for Uncertainty, for audit committees was presented. Examples of probability distributions were discussed, ranging from use of bar charts, candlestick diagrams, pie charts and others. 82% of those voting thought using these in combination would best help accounting for uncertainty.
Simple narrative is also important where management can explain the uncertainty they foresee in valuations, detailing what could be expected and noting the possible impact of certain ‘stress situations’: e.g. an outcome which is considered highly unlikely but conceivable. The Guide thus suggests a sample dialogue between the Audit Committee and the Chief Executive (or the CFO), and 89% of those voting at the conference thought that it would add to an Audit Committee’s understanding of the “company’s position and prospects”; 61% thought the dialogue would help ‘significantly’.
Accounting for Uncertainty: a Guide for Audit Committees is a discussion paper open to comments. ACCA is considering a number of number of ways to follow-up on this work and will update this section accordingly.