Provide An Example Of An Accounting Estimate And Explain How A Change In Your Estimate Could Occur. What Action Does Ias 8 Require When Such A Change Occurs?
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An accounting estimate can be defines as an adjustment of the carrying amount of an asset or a liability or the amount of the periodic consumption of an asset that results from the assessment of the present status and the expected future benefit and obligation associated with assets and liabilities.(IASB)
An example of an accounting estimate is company A making a 5% provision for bad debts on credit sales. This is because company A cant know how much of its receivables that they wont be able to collect. This is to make sure that the entity is prepared for any loss of income associated with their credit sales.
A change in the accounting estimate for bad debts could be cause by a change in the accounting policies that the entity is using and by any changes made by IASB. But because at times it is hard to distinguish between an accounting estimate and an accounting policy, the change is considered an accounting estimate. (IASB)
The IAS 8 required that to recognized the change the change should be recognized prospectively by including it in the profit and loss in the period of the change if the change affects that period only. As with the example of bad debt it will affect the current period of the entity as current sales will be affected by the provision for bad debt.
Another requirement of the IAS 8 is that if the change gives a rise to a change in assets it shall be recognized by adjusting the carrying amount of the related cost. This is because for my example on bad debts the entity will have to reduce its receivables by the amount of the provision for bad debts.
A prospective recognition in the accounting estimate means that the change is applied to the transaction, other events and condition from the date of the change in estimate. This would be that the provision for bad debt would be taken into account and this would affect the current period only. This is recognized as an expense in the current period.