Financial Risk Manager

Ways of Financial and Risk Management

Changes in Accounting Estimates
Tuesday, February 17, 2009

Query:
Useful life of the fixed asset can be revised?

Answer:
Para 32 of (International Accounting Standard) IAS-8, Accounting Policies, Changes in Accounting Estimates and Errors states that as a result of the uncertainties inherent in business activities, many items in financial statements cannot be measured with precision but can only be estimated. Estimation involves judgement based on the latest available, reliable information. For example, estimates may be required of:

bad debts;
inventory obsolescence;
the fair value of financial assets or financial liabilities;
the useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets; and
warranty obligations.

Further, para 34 states that an estimate may need revision if changes occur in the circumstances on which the estiamtes was based or as a result of new information or more experience.

In the light of above management can revise the useful life of the asset as well.

Accounting Treatment:

To the extent that a change in an accounting estimates gives rise to changes in assets and liabilites, or relates to an item of equity, it shall berecognised by adjusting the carrying amount of the related assets, liability or equity item in period of the change.