Part 1 – Judgement day
Judgement… the thing that makes accountants professionals.
As accounting standards are principle-based and the facts and circumstances of transactions differ, preparers inherently apply judgement when they prepare the financial statements. This means that two preparers may not arrive at the exact same answer. There could be various reasons why preparers could arrive at different answers means that it is important to explain to users what judgements have been applied, the key assumptions used, and areas that are subject to estimation uncertainty in preparing the financial statements.
Preparers should disclose:
- Areas of judgement in the application of the accounting policies – Explain how the accounting policies have been applied, e.g. how control exists over certain assets or entities, or considering the existence of risks and rewards in analysing lease and financial asset arrangements.
- Areas of judgement in measuring assets and liabilities – Disclose management’s most difficult, subjective and complex judgements related to estimates included in the financial statements. Specifically, entities should disclose assumptions and uncertainties that may result in a material adjustment to the carrying amounts of assets and liabilities in the next financial year.
Here is an example from the Financial Statements of the Government of New Zealand (prepared using IPSAS) for the year ended 30 June 2019 for the judgements and uncertainties for a class of assets:
| Key Assumptions and Judgements: Electricity generation assets
These financial statements report the value of electricity generation assets at $17.2 billion (2018: $15.9 billion). The assets are made up mainly of hydro, thermal stations and wind farms owned by three electricity generation mixed ownership model entities. There are a range of reasonable judgements and assumptions that could be used in estimating the fair value of these assets. These judgements and assumptions predominantly relate to future revenue streams (eg, wholesale electricity prices, generation volumes) and operating expenses, as well as the discount rate used to calculate the present value of those revenues and expenses. The assumptions and sensitivity analysis of these are set out in note 16. These key assumptions are subject to significant uncertainties driven by unobservable market data, such as growth expectations within various sectors of the economy, planned capital projects and varying risk factors. These assumptions interact dynamically with each other. For example, wholesale electricity prices can affect the amount of generation volumes and operating costs. |
Useful links: GRAP 1 on Presentation of Financial Statements (paragraphs .132 to .142).
Disclaimer
This content has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved or otherwise acted on by the Board.