Note: The estimates involved in asset and liability measurements are referred to as measurement uncertainties. The estimates are required since some of the amounts of the assets and liabilities at the reporting date are uncertain; whether those amounts are materially correct will be confirmed by future events. Users displayed some confusion about the meaning of measurement uncertainties and, to some degree, the discussion of this topic reflects that confusion.
Leading view
A boilerplate statement that certain of the accounting amounts are based on estimates and assumptions and are not as precise as they appear would be useless to professional investors. However, such a statement might serve as a positive reminder to unsophisticated investors.
* Professional investors already know about the imprecision of some financial statement numbers. A boilerplate disclosure stating this is unnecessary and redundant. It can be viewed as a device to attempt to limit legal liability but is of no value to professional investors [p. 2-3, 13, 16]
* Although of no value to professional investors, a boilerplate statement may serve as a warning and may be helpful to unsophisticated investors who may forget that a certain amount of imprecision is inherent in financial statement amounts [p. 13-14, 16].
There is general agreement that disclosures should be made about the detailed estimates and assumptions used to determine material asset and liability amounts unless the disclosures would result in a competitive disadvantage.
* Users very strongly support such disclosures. Accounting amounts have the appearance of precision but they are not precisely determined in transactions for other than cash. As a result, users need to know how the numbers are derived [p. 1, 2-6, 14, 16]
* Regardless of the importance of the estimates and assumptions used, they should not be disclosed if such disclosure would cause competitive disadvantage for or prejudice the negotiations of a company. Disclosures about certain events such as the amount for which a company might be willing to settle a law suit or a bank's willingness to accept some accommodation regarding a troubled loan represent almost "blank checks" to the other party and would be disadvantageous to the company's shareholders [p. 6]
* Although users believe that disclosures should be made about the detailed estimates and assumptions used to determine certain material asset and liability amounts, they are split on whether the information disclosed should be (1) developed by managements and their auditors, based on professional judgment or (2) mandated by standards setters, creating a uniform disclosure requirement. Permitting information to be developed by managements and their auditors provides needed flexibility in selecting those disclosures that are necessary for users to better understand financial statements. Mandating an accounting standard insures that companies will report and that similar events and circumstances will be treated in similar ways [p. 14, 16]
* Some detailed disclosures about estimates and assumptions are already required by GAAP or the SEC. Subject to the caveat that providing information about assumptions and estimates for all accounts would be a logistic nightmare, in many cases, users believe that present disclosure requirements are inadequate, and there is strong sentiment for improvement [p. 2, 4-6]. The accounts for which disclosure is sought vary considerably based on the materiality and importance of the account in a particular industry or to a particular company. Users have specified an array of data for various accounts to be disclosed including:
* Information about the change in the nature of the warranty for a product; for example, has coverage under the warranty or the warranty period changed? However, for the assumptions to support amounts, for example, the experience estimate of problems that will occur during a warranty period, management knows better than anyone else [p. 5]
* The determination of the effect of inventory obsolescence is critical to performance evaluation in some cases [p. 3]. Unsold out-of-fashion ladies clothing has no value. The value of unsold automobiles at the new model introduction date diminishes, however, they still retain significant value
* Stage of completion and status of construction costs on contracts is a critical factor in the analysis of companies materially involved in such contracts [p. 2-3, 13, 15]
* Interest rate, actuarial and other assumptions used in present value and other measurement determinations applied by managements, for example, in determining pension and health care costs and obligations, reserving, asset life, return on operating assets, mortgage banking transaction amounts, etc. Such information would help determine the validity of the assumptions actually used [p. 1, 4, 6, 11]
* The determination of environmental exposure (both identification and measurement) is critical in the manufacturing industry where environmental risk is extraordinary [p. 4].