Question

Is profit a precise number, or is there judgement involved? Please explain your answer.

2. How much do you know about the judgements that went into the financial statements?

Answer 1

1: Calculation of profits involves various judgements in preparing the financial statements within the framework of the double entry system. One important judgement is present in calculation of depreciation in which the business judges the useful life of the Asset. Businesses also makes judgements in revenue recognition for instance Complex cases which involve estimation of revenues which are still uncertain. Other instances where judgements of the management may affect the profits in the financial statement are lease classification and recognition of an asset or a liability. The business also makes a judgement regarding the appropriate discount rate for pension obligations when appropriate rates are not available in the market.

2: Although there are specific requirements for disclosure of all estimations and judgements involved the notes to disclosure of financial statements may not contain complete information of the same. Yet, the notes to financial statement generally contain much information about the judgements that the management has made on depreciation, discount rate and recognition policies applied by the management.