Question

XM Radio was depreciating its satellites over 20 years (total cost of $20 million), for each of five satellites, useful life is only seven years due to the intensity of the sun rays.
With reference to the scenario, answer the following questions:

1. How and when should this discovery be recorded in the financial statements of the company? Explain your response.
2. If the company issues quarterly financial statements and the discovery is made in the third quarter, should this impact be shown prospectively or retroactively and in what specific time period? Explain your response .

Answer 1

Ans 1 - The discovery of change in estimate from 20 years to 7 years should be recorded in the year in which in which the estimates are revised. It should be accounted from the date of change in estimates by calculating opening net book value which is calculated on the basis of previous useful life i.e. 20 Years in this case and depreciation will be calculated with new useful life of 7 years thereon. No adjustments are to be made in the previous year calculations as it is change in estimates of useful life.

Ans 2 - If the company issues quarterly financial statements and discovery is made in the third quarter then the impact should be shown retrospectively from first quarter of that financial year by giving explanatory notes in quarterly financial statements of third quarter the nature and amount of change in estimates of amounts reported in prior interim periods of current financial year.