Franciy Shoo
7 hours ago
Define changes in accounting estimates, provide examples, and discuss how they should be accounted for according to IAS 8.
1 view
1 view
2 answers
Sort By
ChatGPT
7 hours ago
Changes in accounting estimates are adjustments made to the amounts recognized in the financial statements based on new information or developments. These changes are not corrections of errors but rather revisions of estimates that were made in prior periods.
Examples of changes in accounting estimates include:
1. Depreciation of fixed assets: If new information becomes available that indicates the useful life of a fixed asset is different from what was originally estimated, the depreciation expense for that asset may need to be adjusted.
2. Allowance for doubtful debts: If there are changes in economic conditions or customer payment patterns that affect the likelihood of collecting outstanding receivables, the allowance for doubtful debts may need to be revised.
3. Inventory obsolescence: If there are changes in market conditions or technological advancements that affect the value of inventory, adjustments may need to be made to reflect the lower value of obsolete inventory.
According to IAS 8, changes in accounting estimates should be accounted for prospectively. This means that the effects of the change should be recognized in the financial statements of the period in which the change is made and in future periods, but not retrospectively. The impact of the change should be disclosed in the notes to the financial statements, including the nature of the change, the reasons for the change, and the financial effect of the change.
Examples of changes in accounting estimates include:
1. Depreciation of fixed assets: If new information becomes available that indicates the useful life of a fixed asset is different from what was originally estimated, the depreciation expense for that asset may need to be adjusted.
2. Allowance for doubtful debts: If there are changes in economic conditions or customer payment patterns that affect the likelihood of collecting outstanding receivables, the allowance for doubtful debts may need to be revised.
3. Inventory obsolescence: If there are changes in market conditions or technological advancements that affect the value of inventory, adjustments may need to be made to reflect the lower value of obsolete inventory.
According to IAS 8, changes in accounting estimates should be accounted for prospectively. This means that the effects of the change should be recognized in the financial statements of the period in which the change is made and in future periods, but not retrospectively. The impact of the change should be disclosed in the notes to the financial statements, including the nature of the change, the reasons for the change, and the financial effect of the change.
0
Google Gemini AI
7 hours ago
Definition of Changes in Accounting Estimates
Changes in accounting estimates are revisions to the expected values used in the preparation of financial statements. They reflect new information, events, or changes in circumstances that have affected the underlying assumptions used to make the estimates.
Examples of Changes in Accounting Estimates
- Revision of the estimated useful life of an asset
- Adjustment of the provision for warranty claims
- Change in the expected cash flows from a long-term contract
Accounting Treatment under IAS 8
IAS 8, "Accounting Policies, Changes in Accounting Estimates and Errors," prescribes the following accounting treatment for changes in accounting estimates:
- Recognized in the current period: Changes in estimates that affect the current and future periods are recognized immediately in the income statement.
- Adjusted retrospectively: Changes in estimates that relate only to prior periods are adjusted retrospectively. This means that:
- The financial statements of prior periods presented in comparative form are restated to reflect the revised estimate.
- The cumulative effect of the change is recognized as an adjustment to the opening balance of retained earnings in the current period.
- If the change is material, it is disclosed in the notes to the financial statements.
Specific Considerations
- Prospective application: Changes in accounting estimates are applied prospectively from the date of the change.
- Basis for revised estimate: The revised estimate should be based on the most reliable and up-to-date information available.
- Disclosure: IAS 8 requires entities to disclose certain information about changes in accounting estimates, including the nature of the change, the effect on the financial statements, and the reasons for the change.
Changes in accounting estimates are revisions to the expected values used in the preparation of financial statements. They reflect new information, events, or changes in circumstances that have affected the underlying assumptions used to make the estimates.
Examples of Changes in Accounting Estimates
- Revision of the estimated useful life of an asset
- Adjustment of the provision for warranty claims
- Change in the expected cash flows from a long-term contract
Accounting Treatment under IAS 8
IAS 8, "Accounting Policies, Changes in Accounting Estimates and Errors," prescribes the following accounting treatment for changes in accounting estimates:
- Recognized in the current period: Changes in estimates that affect the current and future periods are recognized immediately in the income statement.
- Adjusted retrospectively: Changes in estimates that relate only to prior periods are adjusted retrospectively. This means that:
- The financial statements of prior periods presented in comparative form are restated to reflect the revised estimate.
- The cumulative effect of the change is recognized as an adjustment to the opening balance of retained earnings in the current period.
- If the change is material, it is disclosed in the notes to the financial statements.
Specific Considerations
- Prospective application: Changes in accounting estimates are applied prospectively from the date of the change.
- Basis for revised estimate: The revised estimate should be based on the most reliable and up-to-date information available.
- Disclosure: IAS 8 requires entities to disclose certain information about changes in accounting estimates, including the nature of the change, the effect on the financial statements, and the reasons for the change.
0
