Confidence Accounting and its importance to financial markets, 2012

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Attention remains on how to bring greater resilience and stability to global capital markets, including through reforms in financial accountiing. Company valuation with a single point value, asserts, as it did, that an investment bank’s risks are fully costed and covered, or, as it does, that all fossil fuel reserves valued in an energy company’s accounts can with full certainty be burnt, regardless of global warming risks. Neither is true.

Regulators now recognise the benefits of Confidence Accounting to move from ‘point value’ to ‘range value’ financial accounts. This is explained in detail in the publication Confidence Accounting, a proposal from Longfinance, the Association of Chartered Certified Accountants (ACCA) and the Chartered Institute of Securities and Investment (CISI).

 

Key forecasts Equity distribution

For this hypothetical company, Confidence Accounting answers the question ‘Is this company a going concern?’ The finance director’s report would state that the mean value of equity at the balance sheet date is £36bn, with a conventional minimum of £6.5bn and a maximum of £65bn, with 95% confidence the value of equity is at least £24bn. The 95th percentile value, or confidence limit, is used in Confidence Accounting to support a ‘going concern’ assertion. If the state of the world doesn’t change, and the accounts are competently drawn up, the realised value of the balance sheet should be no more than £12bn (£36-24) worse than the mean. Source: Z/Yen Group, 2011.

April 2012, MM/MMG