Changes in accounting estimates
In preparing financial statements, it may be difficult to arrive at exact values for certain items to be presented in the financial statements and thus estimates are normally used.
Examples of estimates: Depreciation, provision for doubtful debts and other provisions in relation to contingent liabilities e.g. pending court cases (suits)
These estimates are based on the available information as at the time of preparing financial statements.
However, in subsequent financial periods, changes may be required on these estimates because of new information becoming available. IAS 8 requires that a change in accounting estimate should be accounted for in the period in which the change arises and where relevant, in other subsequent financial period. E.g. an increase or decrease in provision for doubtful debts will be adjusted for in the current years income statement whereas depreciation will not only be adjusted for in the current year but also in the subsequent financial periods. i.e. the remaining Net Book Value of the assets will be depreciated over the remaining useful life starting with the current financial period.