Change in accounting estimate

Last update 23/08/2019

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 of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not correction of errors.

Therefore no retrospective restatement of financial statements is needed. The adjustment is recorded in profit or loss in the period it was re-estimated/re-calculated/re-validated.

The need for estimation is a result of uncertainties inherent in conducting the entity’s operations, due to which items in the financial statements can only be estimated. Estimation involves judgements based on the latest available, reliable information. The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.

For example, estimates may be required of:

1. Tax revenue due to government;
2. Bad debts arising from uncollected taxes;
3. Inventory obsolescence;
4. The fair value of financial assets or financial liabilities;
5. The useful lives of, or expected pattern of consumption of future economic benefits or service potential embodied in, depreciable assets, or the percentage of completion of road construction; and
6. Warranty obligations.

Where a change in accounting estimate gives rise to changes in assets and liabilities, or relates to an item of net assets/ equity, it shall be recognised by adjusting the carrying amount of the related asset, liability or net assets/ equity item in the period of the change.

In any other case, a change in accounting estimate shall be recognised prospectively by including it in surplus or deficit in:

1. The period of change, if the change affects the period only; or
2. The period of the change and future periods, if the change affects both

Change in accounting estimate

Change in accounting estimate

Change in accounting estimate Change in accounting estimate Change in accounting estimate Change in accounting estimate Change in accounting estimate