Including estimates of the future in today's financial statements

BIS Working Papers No 208
August 2006

On 11-12 November 2005, the BIS held a workshop on Accounting, risk management and prudential regulation, which brought together a multi-disciplinary group of around 35 external participants including senior accounting practitioners, standard setters, finance academics, supervisors and central bank officials. The workshop programme is attached. This paper was presented at the workshop.


This paper explains why the question is how, not if, today's financial statements should include estimates of the future. Including such estimates is not new, but their use is increasing. This increase results primarily because standard setters believe asset and liability measures that reflect current economic conditions and up-to-date expectations of the future will result in more useful information for making economic decisions, which is the objective of financial reporting. This is why standard setters seem focused on fair value accounting. How estimates of the future are incorporated in financial statements depends on the asset and liability measurement attribute, and on financial reporting definitions of assets and liabilities. The present definitions depend on identifying past transactions or events that give rise to expected inflows or outflows of economic benefits and, for inflows, control over the expected benefits. Thus, not all expected inflows or outflows of economic benefits are recognised. Note disclosures can help users understand recognised estimates, and can provide information about unrecognised estimates. Including more estimates of the future in today's financial statements would result in an income measure that differs from today's income, but arguably provides better information for making economic decisions.

JEL classification: E58, G15, M41.

Keywords: Fair value, financial reporting, financial statements