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Under a Creative Commons license Open access AbstractFinancial statements represent a great source of information for company's financial position and business performance evaluation. Management judgment depends on the information base which is given at the time of judgement. Each judgement is by its nature subjective, so the results of the estimation can differ. Non-current tangible and intangible assets represent a significant proportion of assets of many companies. There is a plenty of space for applying accounting estimates in order to recognise and measure such assets. The research model confirmed the volatility of financial condition and performance of a company as a result of different accounting estimates. Keywordsaccounting estimates business performance financial position intangible assets tangible assets Cited by (0)© 2016 The Author(s). Published by Elsevier B.V. UK regulator the Financial Reporting Council (FRC) published Tuesday its thematic review of judgements and estimates update, identifying
areas where the overall quality of judgement and estimate disclosures had improved — and where further change is needed. Companies are required to disclose more complex accounting judgements and the most significant sources of estimation uncertainty. "These disclosures allow readers to assess how the accounting policies applied have been affected by the judgements taken by management," according to the report. "They facilitate a better understanding of assumptions made about the future and the extent to which changes to those assumptions may affect a company's future position." The FRC identified four areas where there is room for improvement:
The FRC's first thematic report on the topic of judgement and estimation uncertainty disclosures was published in November 2017. To encourage improvement in the general quality of company disclosures, the review includes examples of good practice, including:
— To comment on this article or to suggest an idea for another article, contact Kevin Brewer at . 4 May 2020 The outbreak of Coronavirus could have a significant effect on the assumptions, estimates and accounting judgements entities take, which will then need to be reflected in the disclosures. This could impact reporting dates ending before as well as after the emergence and spread of coronavirus, for example, where critical judgements have been exercised in determining whether post balance sheet events are adjusting or not, or whether accounts should be prepared on a going concern basis. What does FRS 102 say?Entities reporting under FRS 102 must provide disclosures in their financial statements regarding key assumptions concerning the future, and other key sources of estimation uncertainty and significant accounting judgements. “An entity shall disclose, along with its significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.” (FRS 102.8.6) “An entity shall disclose in the notes information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial
year. In respect of those assets and liabilities, the notes shall include details of: For small entities reporting under section 1A of FRS 102, these same disclosures, whilst not mandated, may still need to be given to meet the overriding requirement for financial statements to give a true and fair view as well as to ensure the accounting policies adopted are clearly disclosed. (FRS 102 1A.5-6, 1A.16-17) “The accounting policies adopted by the small entity in determining the amounts to be included in respect of items shown in the statement of financial position and in determining the profit or loss of the small entity must be stated (including such policies with respect to the depreciation and impairment of assets). (Schedule 1, paragraph 44)” (FRS102.1AC.3) “Paragraph 8.5 addresses similar requirements for disclosing significant accounting policies. Including information about the judgements made in applying the small entity’s accounting policies, as set out in paragraph 8.6, may be useful to users of the small entity’s financial statements.” (FRS102.1AC.3) Practical impact and interpretation for preparersSignificant accounting judgements Disclosure of the most important judgements helps users of financial statements to understand how accounting policies have been applied and to make comparisons between entities. Accordingly, such disclosures are most useful when they are not ‘boilerplate’ and explain clearly the most important judgements made. Examples of significant accounting judgements that might arise and require disclosure as a result of the impact of coronavirus are:
Key assumptions concerning the future, and other key sources of estimation uncertainty Determining the carrying amount of some assets and liabilities requires estimation of the effects of uncertain future events eg in the absence of recently observed market prices, future-oriented estimates are necessary to measure: the recoverable amount of classes of property, plant and equipment; the effect of technological obsolescence on stocks; provisions subject to the future outcome of litigation in progress; and defined benefit pension obligations. These estimates involve assumptions about such items as the risk adjustment to cash flows or discount rates, future changes in salaries and future changes in prices affecting other costs. The assumptions and other sources of estimation uncertainty to be disclosed relate to the estimates that require management’s most difficult, subjective or complex judgements. Those judgements become more subjective and complex as the number of variables and assumptions affecting the possible future resolution increases. The potential for a consequential material adjustment to the carrying amount of assets and liabilities normally increases accordingly. Disclosure is not required for assets or liabilities that are measured at fair value based on a quoted price in an active market for an identical asset or liability (even if there is a significant risk that their carrying amounts might change materially within the next financial year) because these changes would not arise from assumptions or other sources of estimation uncertainty at the end of the reporting period. Disclosures should be presented in a manner that helps users of the financial statements to understand the assumptions management makes about the future and about other key sources of estimation uncertainty. The nature and extent of the information to be disclosed will vary according to the nature of the assumptions and the other circumstances. Although FRS 102 does not contain an explicit list of the types of disclosures required, IAS 1, which deals with the equivalent requirements under IFRS, provides a useful benchmark. The examples in IAS 1 are:
It is not necessary to disclose budget information or forecasts in making these disclosures. It may be impracticable to disclose the extent of the possible effects of an assumption or another key source of estimation uncertainty at the end of the reporting period. The entity should consider disclosing that it is reasonably possible that outcomes within the next financial year will be materially different from the assumptions and could require a material adjustment to the carrying amount of the affected asset or liability. In all cases, the nature and the carrying amount of the specific asset or liability (or class of assets or liabilities) should be disclosed under FRS 102. Examples of key assumptions concerning the future, and other key sources of estimation uncertainty, that might require disclosure include:
Our adviceJudgements, estimates and disclosures are going to be more complicated and take time to prepare so it is advisable to start early. Management should set out the judgements and estimates they normally make and additionally those arising from coronavirus so that these can be incorporated into the accounts. These should be specific to the entity and not boilerplate. There is increased risk that the carrying amounts of various assets and liabilities may require material adjustments within the next financial year. All entities should carefully consider whether additional disclosures are necessary in order to help users of financial statements understand the judgement applied in their financial statements. For small entities reporting under FRS 102 section 1A, although there are not the same detailed disclosure requirements, there is still the requirement to show a true and fair view and an assessment should be made of whether these disclosures are required. For further information contact How do estimates affect financial statements?They are used in the financial statements to determine the carrying amounts of assets and liabilities and the associated income or expense for the period where such amounts cannot be measured with precision and certainty. Examples of accounting estimates include: Useful life of non-current assets.
Why is Judgement important in the financial reporting process?Importance of judgments and estimates
The disclosure of information about the assumptions that have the most significant effect on those estimates enhances the relevance, reliability and understandability of the information reported in financial statements.
How is a change in estimate reflected in the financial statements?Changes in estimates, such as the estimated useful like for a tangible asset or the bad debt allowance percentage, are accounted for on a prospective basis. This means that the current and future financial statements must reflect the change, but the company does not need to change historical periods.
What is use of Judgement and estimates?Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations on future events that are believed to be reasonable under the circumstances. The Group makes estimates and takes assumptions concerning the future.
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