Are you sure about degrees of certainty?

Ranging from remote to virtually certain, degrees of certainty can mean different things to different people, showing (almost certainly) that accounting still remains an art, argues LSCA Technical Committee chair Jamie Tomlin.

May 2018

I am confused. Accounting requirements in many areas are determined by likelihood, with different treatments depending upon where in the ‘scale of likelihood’ the trigger sits. This scale at (nearly) the extremes goes from remote to virtually certain, via such points as unlikely, possible, likely, probable, reasonably certain, and virtually certain. A trawl through the standards will reveal more.

This creates challenges. How do I know that my understanding of what these mean is consistent with the preparer, or that both of us have an understanding that is consistent with that envisaged by the standard?

I guess we could convert these into probability percentages to show, for example, at what point highly probable is considered to apply, be this 75%, 80% or 85%. At least all parties using the accounts would know where these different likelihoods sit, both relatively and absolutely. A likelihood thermometer would make for an interesting graphic within accounting policies!

Of course, this is only part of the challenge. To apply an accounting requirement, I have to assess an unknown, to attach a likelihood determined on future uncertain events. With a large population of forecastable events this may be possible, but in the real world this is rarely the case.

So, we are left with preparers attaching a likelihood to a single uncertain future event. I then audit it. And what is the cumulative impact on reported results should a number of likelihoods be assessed at just below various critical, or tipping, points?

For those of a certain age, a comparison with leases which had an NPV of 89% provides a good illustration of this. FRS 102 was a welcome improvement on SSAP 21.

But even if I can get a grip on this, what about comparability between different entities? Or GAAPs? IFRS and US GAAP both use probable, but with different meanings! This issue has been solved for IFRS 15, but the use of a common language could still lead to accounting differences.

This is simply another example that serves to emphasise how, despite public expectations, modern accounting remains very much an art.

Jamie Tomlin is chair of the LSCA Technical Committee

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