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Prospective application of a change in accounting policy and of recognising the effect of a change
in an accounting estimate, respectively, are:
– Applying the new accounting policy to transactions, other events and conditions occurring
after the date as at which the policy is changed
– Recognising the effect of the change in the accounting estimate in the current and future
periods affected by the changeAbove is a quotation from BPP which probably comes from IAS 8.
A:
Now, suppose an accounting period starts at 1st Jan 2000 to 31st Dec 2000, a non current asset at cost of $100,000 originally with 10 years at the beginning of the period
and that a change of useful life occurs on 1st August 2000 to 80 years, what is the depreciation for the year?I am asking the question to understand clearly the difference between changes in accounting estimates and policies.
B:
Suppose useful life is changed at:
1) 31st December 2000
2) 1st January 2001
Will there be a different treatment?C: When the standard (IAS 8) speaks on Accounting Estimates that both current and future periods are affected, does it mean to override even the depreciation for the current year already incurred and account for the New one in full or we account for the rest of months?
Thanks
“Now, suppose an accounting period starts at 1st Jan 2000 to 31st Dec 2000, a non current asset at cost of $100,000 originally with 10 years at the beginning of the period
and that a change of useful life occurs on 1st August 2000 to 80 years, what is the depreciation for the year?”Point number 1 – how can an asset with an estimated useful life of 10 years suddenly find that it really should be 80 years? That’s outrageous!
At the date of the change in estimated useful life, was the 80 years with effect from 1 August? In which case, depreciation at the rate of 10% (10 year life) for the 7 months to end July is appropriate so that would be $5,833
And then 5 months out of 960 (12 months x 80 years) calculated on the carrying value of $94,167 ($100,000 – $5,833) = $490
But, let’s be honest! That’s a daft question
In practice depreciation is most often calculated at the end of the year for the purposes of preparing the annual financial statements so the year’s depreciation would be $100,000 / 80 years
And that would also apply if the revised estimate were to be applied from the date of acquisition ie 1 January, 2000
“Suppose useful life is changed at:
1) 31st December 2000”Same comment – depreciation for the full year would be calculated on the basis of an 80 year life
“Suppose useful life is changed at:
2) 1st January 2001”The financial statements are prepared after the year end and, again, practically speaking, 80 years would be applied – the management didn’t suddenly, at the New Year’s Eve party, decide that 10 years was too short and rush into the office to change estimated remaining useful life to 80 years if the 80 were to be considered to be the useful life of the asset and 1 year has now passed
I think I’ve answered point c)
OK?
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