The accounting rules for changes in estimates are in section 10.15 of the standard. They are dealt with prospectively i.e. by including the effect in profit or loss in the period of the change and, if relevant, in future periods. Adoption of the new FRS 102 standard is not an opportunity to revisit accounting estimates retrospectively (thereby pushing changes through reserves rather than recognising them in profit).
The standard gives very little explanation as to what an ‘estimate’ actually is.
Typical estimates might include:
- Determining an impairment for doubtful debts;
- Impairments for slow-moving or obsolete stock;
- Estimating the useful life of tangible fixed assets;
- Fair values of financial assets and liabilities;
- Recoverability of deferred tax assets; and
- Estimating the correct value for warranty provisions.
Related to the above are two completely new disclosures required in FRS 102 that were not specifically addressed in old GAAP. They are:
- Information about judgements that management has made in applying the accounting policies and that have the most significant effect on the amounts recognised in the financial statements. FRS102 paragraph 8.6.
- Information about key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, including details of their nature and carrying amounts. FRS102 paragraph 8.7.
Many sets of FRS 102 financial statements that we have reviewed in the last 12 months don’t need any transition journal entry adjustments but are lacking sufficient information about judgements and key sources of estimation uncertainty. Greater care and attention is needed by preparers in these particular areas in order to fully comply with the standard.