1. A manufacturing company is preparing its year-end financial statements and is

ID: 2569110 • Letter: 1

Question

1. A manufacturing company is preparing its year-end financial statements and is considering the accounting for the following items

Identify (a) whether the item is a change in principle, a change in estimate, or an error. Then (b) explain the rationale for your choice.

a) The vice president of sales indicated that one product line has lost its customer appeal and will be phased out over the next 3 years. Management made a decision to lower the estimated lives on related production equipment from the remaining 5 years to 3 years.

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b) One of the company’s buildings was converted from a sales office to offices for the accounting department at the beginning of the year. Therefore, the expense related to this building will now appear as an administrative expense rather than a selling expense on the current year’s income statement.

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c) Estimating the lives of new products in Division ABC has become very difficult because of the highly competitive conditions in this particular market. Therefore, the practice of deferring and amortizing preproduction costs has been abandoned in favor of expensing such costs as they are incurred..

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Explanation / Answer

a) Management's decision of changing the useful life is considered as "change in Estimate"

b)Reasons:

As per IAS 8,

1) Estimates must be revised when new information becomes available which indicates a change in circumstances upon which the estimates were formed.

In this case, Managment decided to change the useful life based on the new information, which is phasing out a product line.

2) IAS 8 also specifies errors are "omissions and misstatements in an entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available and could reasonably be expected to have been obtained"

So, In this case , the information was not available during prior years, so it cannot be considered as error.

3) Also, Changing of Useful life cannot be considered as Change in principle. If, Depreciation method is changed, it would have been considered as change in principle.

so, In this case it cannot be considered as principle change.

Answer:

Considering the above facts, it is clear that the Given case is " CHANGE IN ESTIMATES"

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