Why ‘confidence accounting’ has a particular relevance to companies whose value depends on natural resources
Michael Mainelli and Jan-Peter Onstwedder write about ‘confidence accounting’ – a new approach proposing that accounts show ranges of valuations, with a clear and concise explanation of the assumptions used to generate the expected value, hereby giving insight into associated uncertainties, such as with climate change.
Using Carbon Tracker’s ‘Unburnable Carbon’ analysis, the authors’ demonstrate that in cases of political or scientific uncertainty, accountants can take widely different approaches. Therefore the consistent use of confidence ranges in natural reserves accounting, for example, would mitigate the risk of misallocating financial resources of clients. This methodology would also go some way to clearly demonstrate the views and beliefs the management holds – these beliefs would no longer be muffled in the woolly marketing phrases of the management discussion, but in quantitative charts and tables complete with assumptions and methodoologies.
‘Uncertainty is everywhere. Dealing with uncertainty is what analysis is all about. Uncertainty is part of every decent financial analysis today. Shouldn’t is be part of accounting, too?’
Read the full article for zyen.com and the Institute of Chartered Accountants of Scotland here