Prospective recognition of a change in estimate

Learning objectives

• Calculate the revised depreciation charge after a change in useful life, residual value or depreciation method.L1, L2, L3
• Record the effect of a change in accounting estimate in profit or loss of the period or by adjusting the carrying amount of an asset or liability.L2, L3
• Identify errors in the treatment of a change in accounting estimate (restatement of comparatives, adjustment against equity).L1, L2

Normative references

• IAS 8 §5Definitions: accounting policies — the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements; accounting estimates — monetary amounts in financial statements that are subject to measurement uncertainty; 'material' — used as defined in IAS 1 (para. 7); prior period errors — omissions from, and misstatements in, the financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available when those financial statements were authorised for issue and could reasonably be expected to have been obtained and taken into account (mathematical mistakes, mistakes in applying accounting policies, oversights, misinterpretations of facts, fraud); retrospective application — applying a new accounting policy as if that policy had always been applied; retrospective restatement — correcting the recognition, measurement and disclosure of amounts as if the error had never occurred; prospective application — applying a new policy to transactions occurring after the date of the change, and recognising the effect of a change in estimate in the current and future periods affected; impracticable — a requirement the entity cannot apply after making every reasonable effort to do so, which, for a prior period, covers three situations: effects not determinable; assumptions required about what management's intent would have been at the time; significant estimates for which it is impossible to distinguish objectively information that provides evidence of circumstances that existed at that date and that would have been available when the financial statements were authorised for issue.
• IAS 8 §34An accounting estimate may need to be changed as a result of changes in the circumstances on which it was based, new information, new developments or more experience; by its nature, such a change does not relate to prior periods and is not the correction of an error.
• IAS 8 §36Except in the case covered by para. 37, the effect of a change in accounting estimate is recognised prospectively in profit or loss: in the period of the change only, if the change affects that period only, or in the period of the change and future periods, if the change affects both.
• IAS 8 §37To the extent that a change in accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related asset, liability or equity item in the period of the change.
• IAS 8 §38A change in accounting estimate may affect only the current period's profit or loss, or that of both the current period and future periods: for example, a change in the estimated useful life of a depreciable asset, or in the expected pattern of consumption of its future economic benefits, affects depreciation expense for the current period and for each future period during its remaining useful life. In all cases, the effect relating to the current period is recognised as income or expense in that period, and any effect on future periods is recognised in those future periods.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

29 questions

• Arvane acquired a machine for {cost} on 1 January 2023, depreciated on a straight-line basis over {initial_life} years with no residual value. At 1 January 2025, the total useful life is reduced to {revised_total_life} years. Compute 2025 depreciation under the prospective treatment, the amount an erroneous retrospective restatement would give (new life applied from the start) and the gap.L3
• To measure what a misclassification would cost, Velbor's controller compares two computations: equipment costing {cost} brought into use on 1 January 2022, expected to last {initial_life} years (straight-line, no residual value), has its total life revised to {revised_total_life} years at 1 January 2025. What is 2025 depreciation under each approach, and what is the gap?L3
• Laivot updates the discount rate of a provision at the 2025 reporting date: at the previous rate, the provision would be {provision_old_rate}; at the new rate, {provision_new_rate}. What amount is recognised as a 2025 expense for this change?L3
• Pomède acquired a press for {cost} on 1 January 2024, depreciated on a straight-line basis over 5 years with no residual value. At 1 January 2025, it adopts units-of-production depreciation: {remaining_units} units expected over the remaining life, of which {units_2025} produced in 2025. Compute 2025 depreciation and its increase compared with keeping straight-line.L3
• Apart from specific cases, the effect of a change in accounting estimate is recognised prospectively in profit or loss.L1
• A change in accounting estimate requires comparatives and opening equity to be restated.L1
• Revising the useful life of a depreciable asset changes depreciation for the current period and for each future period of its remaining useful life.L2
• A change in estimate at Gandot affects only the current period. Where is its effect recognised?L1
• Leusot's change in estimate changes a liability recognised in the statement of financial position. How is it recognised?L2
• At 1 January 2025, Traindore reduces the remaining useful life of its servers. Which periods does the effect of this change affect?L2
• At 1 January 2025, a van of Jilvane has a carrying amount of {carrying_amount}; its remaining useful life is revised to {remaining_life} years, with no residual value. What is the annual straight-line depreciation from 2025?L1
• Zylbane acquired a production line for {cost} on 1 January 2021, depreciated on a straight-line basis over {initial_life} years, with no residual value. At 1 January 2025, its remaining useful life is reduced to {revised_remaining_life} years. Compute the carrying amount at the date of change and 2025 depreciation.L2
• A forklift of Taulbine, brought into use on 1 January 2022 for {cost} and expected to last {initial_life} years (straight-line, no residual value), wears out faster than expected: at 1 January 2025, only {revised_remaining_life} years of use remain. What is its carrying amount at that date and what depreciation should be recognised for 2025?L2
• Merlane acquired a machine for {cost} on 1 January 2023, depreciated on a straight-line basis over {initial_life} years with no residual value. At 1 January 2025, the remaining life is unchanged but a residual value of {revised_residual_value} is now expected. What is 2025 depreciation?L2
• Quernys acquired equipment for {cost} on 1 January 2022, depreciated on a straight-line basis over {initial_life} years with no residual value. On 1 July 2025, its remaining useful life is revised to {revised_remaining_life} years from that date. Compute the carrying amount at 1 July 2025 and total 2025 depreciation.L3
• At the 2025 reporting date, Pilade increases its warranty provision from {provision_before} to {provision_revised}, in light of new claims. What amount is recognised as a 2025 expense?L2
• Navarelle holds {receivables} of receivables, with a loss allowance of {previous_allowance}. New default data lead to an expected loss rate of {revised_rate_per_mille} per thousand (case data). Compute the revised loss allowance and the additional 2025 loss.L3
• An industrial building of Quélix, acquired on 1 January 2020 for {cost} and depreciated on a straight-line basis over 10 years with no residual value, will in fact have a residual value of {revised_residual_value} (estimate revised at 1 January 2025, life unchanged). Compute the revised depreciation and the decrease in annual depreciation.L3
• At 1 January 2025, the carrying amount of a furnace of Bramelle is {carrying_amount}; its remaining useful life is revised to {remaining_life} years, with no residual value. Record the 2025 depreciation entry.L2
• At the 2025 reporting date, Doulane raises by {increase} the estimate of its provision for cleaning up land contaminated by its past operations, following a new quotation (the provision is not included in the cost of any asset, case data). Record the entry.L2
• As the return rate of its products has fallen, Saulvois reduces its warranty provision by {decrease} in 2025. Record the revision.L2
• Updated default data lead Plaudard to increase the loss allowance on its receivables by {allowance_increase} in 2025. Record the entry.L3
• In 2025, Silvarne revises two estimates: the year's depreciation of an item of equipment, recomputed over its revised remaining life, is {revised_depreciation}; a litigation provision increases by {provision_increase}. Record the 2025 entries.L3
• For a machine acquired 2 years ago for 120,000 (initial life 10 years), whose total life is revised to 6 years, Gandine's accountant computes the year's depreciation as follows: 120,000 ÷ 6 = 20,000. What is the error?L2
• Vrynois increases a warranty provision following new claims. Its accountant charges the increase to opening retained earnings 'so as not to penalise the year'. What is the error?L1
• Chausia reduces the estimate of a provision by 20,000. Its accountant recognises income of 20,000 but, as the other side, records a sundry receivable instead of reducing the provision. What is the error?L2
• In 2025, Galvorne finds that its trucks are wearing out faster than expected and reduces their remaining useful life. Its finance director proposes three treatments. Which one should be used?L2
• The loss allowance on Vrimane's receivables must increase by 45,000 at the 2025 reporting date, based on the latest default data. The finance director proposes to spread the increase over three years 'to smooth the effect'. What is the conclusion?L3
• Ravelline finds that the economic benefits of its packaging machines are now consumed faster early in the remaining life. It revises the expected pattern of consumption at 1 January 2025. Which depreciation charges are affected?L3