The values recorded for items in the financial statements are sometimes uncertain. Where the uncertainty will be resolved through some future event, such as a court case, the organization has a contingency. Where the uncertainty is a result of management’s inability to determine the amount with accuracy, we refer to this as measurement uncertainty.
Where it is reasonably possible that the value of an item recognized in the financial statements could change by a material amount, this fact should be disclosed.
In the application of the preceding, the following applies:
- Materiality is a matter of professional judgment, but is defined as an amount that would influence the decision of a reader of the financial statements. An auditor would have a quantified notion of materiality in forming the audit opinion.
- Disclosure should be made of the nature of the uncertainty. (1508.05) This would include a description of the reason for the uncertainty and any significant information regarding the resolution of it.
- The statements might also include information about assumptions, changes in assumptions, and the sensitivity of assumptions.
- The recognized amount of any item subject to measurement uncertainty should be disclosed. (1508.07)
- It is possible that the organization could forego referring to the recognized amount of an item, if the organization feels there would be a significant adverse effect. In which case, the statements would have to explain the reasons for not disclosing the recognized amount.
If it is reasonably possible that an item could change by a material amount within one year of the balance sheet date, there should be an estimate of the possible amount of change to the item. (1508.06)