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Hello Mike,
I am sorry for reposting though I believe you should be giving atleast 12 hrs before closing threads.Of course I mistyped 8 yrs for 80yrs.
Also, I know about the common practice to review At year end rather than mid way though no restriction.
My sole aim is to know how to treat accounting estimates prospectively.
There is a question on useful life change at year end which Mr John Moffat has recalculated depreciation using carrying amount and n + 1 years claiming that the depreciation for the current year is also to be revised.
The standard on Accounting estimates says to apply prospectively the effects on current and future periods.
According to Moffat, change of useful life at year end when added with 1, is used to recalculate depreciation of the current year.
**So I am asking the link between words Current and Prospective.
**Also, help me with just part C.
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?
The quote from BPP is correct – it’s just that depreciation is calculated at the bend of the year when all current information is available
IF your question had said a 10 year original estimate but, at the end of the SECOND year (so carrying value before year 2 depreciation is calculated would be $90,000) the estimate was revised to 7 REMAINING years instead of 8 more after year 2, that $90,000 would be depreciated over this second year at $90,000 / 8 and the balance then depreciated evenly over the remaining 7
It’s an estimate and, in common with other estimates, current information is used where possible
Again, I feel that I’ve just answered part c)
Frankly, it would be stupid at the end of year 2 to say “Ah, even though there are now only 7 remaining years (8 if we include the year just ended) we’re going to depreciate the year just ended as though we don’t know of the revision”
Closure of posts is to prevent other students asking questions that are totally unrelated to the topic of the thread – sorry, but I’m going to continue with that policy
Now you are confusing me too.
I asked you about the treatment of say
1: 31st December 2015 and
2: 1st January 2016and you said that the treatment is the same.
But for this new explanation of yours, the treatment will be different.**My Question again on IAS 8,
about changes in Estimates:What does PROSPECTIVE Application on CURRENT period actually mean?
Because your new answer contradicts with the previous where you said to apportion.
The difference between 31 December 2015 and 1 January 2016 is 3/4 of a nano-second
Get real! When the auditors arrive and say “Exactly on what date and at what time did you, the board, decide to re-assess the estimated useful life of these assets?”
And the board replies “Why, on 31 December of course. At 16.32, just before the office new year party kicked off”
But, technically, you are correct! In exam questions where there is a revaluation as at the start of the new year, exam answers depreciate at the original rate for the year just ended and expect you to depreciate at the revised rate for the year just commencing
Prospective refers to the future whereas current applies to this year
There does appear to be some inconsistency in exam answers!
OK?
Prospective refers to the future whereas current applies to this year, I just quoted you.
Have you re-checked IAS 8 on accounting estimates. Right now you just changed again.
If you mean them to be the same practically (I believe so too) BUT insist on adding back last year to remaining useful life for calculating new depreciation, then you must mean that most solutions in books are wrong as all life reviews would at the beginning of the next period would also need to be combined with one year, something not true.
I agree with that – as I’ve just said in my previous post, there are inconsistencies between exam answers and practicalities
If you are looking for advice, I suggest that you follow the method adopted in exam answers
My only concern is that, when looking at the review of the remaining useful life, it’s often stated that the asset has, at the date of the review, a further 8 years (say) whereas deprecation for the year should be based on the assessment that prevailed throughout the financial period just ended
I’m not sure that that isn’t an ambiguity from within the IAS
But, as I’ve just suggested, I believe that you should calculate depreciation on the original estimate up to the date of the revision and, from that date, calculate depreciation on the revised estimate
Is that better?
Thank you sir.
I will swallow your last statement as I believe it to be right because PROSPECTIVE on CURRENT PERIOD would mean a CURRENT PERIOD but NOT WHOLLY accounted for to the EXTENT of months passed.
This would make say 31.12.2000 and 01.01.2001 be practically the same as dictated by logic and standard setters use logic too.
But then, this would mean that BPP are not the most right in the world (I use their materials though) as they did not comply with IAS 8 on accounting estimates.
Thank you
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