Principles of Asset Recognition when Future Benefits are Uncertain

Abstract

We study asset recognition principles in terms of the level of uncertainty in the future benefits to such assets. From a real effects perspective, we establish that there is a threshold of uncertainty beyond which it is better to leave assets unmeasured and comingled with operating profits. We investigate the determinants of that threshold and derive the surprising result that the higher the expectation of future benefits the lower should be the level of uncertainty in future benefits that is required to measure and recognize assets. The risk-return tradeoff for reporting choices is quite different from the risk-return tradeoff for making investment decisions.

Keywords: Investment Measurements, Managerial Myopia, Real Effects

JEL Classification: G31, G34, M41