Question

Why are there differences in presentation for changes in estimates and changes in accounting principle? Discuss the need for disclosures of either one and what information would typically be disclosed?

Answer 1

A Change in accounting principle is a term used when a business selects between different generally accepted accounting prnciples or changes the method with which a principle is applied. Changes can occur within accounting frameworks for either generally accepted accounting principles or International Financial Reporting Standards. A change in Accounting estimate is the change that has the effect of adjusting the carrying amount of an existing asset o liability or altering the subsequent accounting for existing or future assets or liabilities. A change in accounting estimate is a necessary consequence of the assessment, in conjunction with the periodic presentation of financial statement of the present status and expected future benefits and obligations associated with assets and liabilities. Changing an accounting principle is different from change in accounting estimates. Accounting principles impact the methods used, whereas the estimate refers to specific recalculation. An example of change in accounting principle occurs when a company changes its system of inventory valuation. An entity shall account for change in accounting principle through retrospective application of that accounting priciple. An entity shall account for change in accounting estimate through prospective application of the same.

Need for disclosure of accounting estimate and information to be disclosed.

​Management makes many judgements and estimates in preparing financial statements, some of which will have significant effect on reporting results and financial positions. Information about the key judgements and estimates made is of value to investors as it helps them to assess an entity's financial position and performance and understand the sensitivities to changes in assunptions. High quality disclosure in this area, possibly including quantified information such as sensitivities or a range of possible outcomes, on how changes to estimates could affect the following year's results enables users to assess the quality of management's accounting policy decisions and the likelihood of future changes in a way that generic disclosures do not.

What to disclose

​​When there are uncertainties that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year, the notes to the financial statements need to disclose, information about the assumptions concerning the future; and other major sources of estimation uncertainty at the end of the reporting period.

In respect of those assets and liabilities, the notes need to include details of their nature and their carrying amount at the end of the reporting period.

IAS 1 states that the disclosures should be presented in a way that helps users of the financial statements to understand the judgements 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. IAS 1.129 gives the following examples of the types of disclosures to be made the nature of the assumption or other estimation uncertainty the sensitivity of the carrying amounts to the methods, assumptions and estimates underlying their calculation, including the reasons for the sensitivity the expected resolution of an uncertainty and the range of reasonably possible outcomes within the next financial year in respect of the carrying amounts of the assets and liabilities affected; and an explanation of changes made to past assumptions concerning those assets and liabilities, if the uncertainty remains unresolved.

In more complex circumstances, it may be necessary to go further than simply providing these example disclosures to enable users to understand fully the estimates and judgements made in the preparation of financial statements.

Note that IAS 1 confirms that it is not necessary to disclose budget information or forecasts in making these disclosures.

Sometimes, 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. In such cases, IAS 1 requires the entity to disclose that it is reasonably possible, based on existing knowledge, that outcomes within the next financial year that are different from assumptions 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, needs to be disclosed.

Other IFRSs include specific requirements for disclosures that would otherwise be required by IAS 1, for example, IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires disclosures, in specified circumstances, of major assumptions concerning future events affecting classes of provisions; IFRS 13 Fair Value Measurement requires the disclosure of significant assumptions, including the valuation techniques and inputs, the entity uses when measuring the fair values of assets and liabilities that are carried at fair value.

Compliance with specific disclosure requirements of other standards may not be sufficient to meet IAS 1’s requirements. For example, it is possible that impairment testing of property, plant and equipment could involve assumptions that fall within the scope of IAS 1.125. In such cases, sensitivity disclosures may need to be provided to meet IAS 1’s requirements even though they are not explicitly required for impairment tests of such assets by IAS 36 Impairment of Assets.