Change in accounting estimate

Change in accounting estimate – An adjustment of the carrying amount of an asset or a liability, or the amount of the periodic consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and, accordingly, are not correction of errors.

Therefore no retrospective restatement of financial statements is needed. The adjustment is recorded in profit or loss in the period it was re-estimated/re-calculated/re-validated.

Change in accounting estimate

Changes in accounting policies | Correction of errors Changes in estimates

Estimation involves judgements based on the latest available, reliable information. For example, estimates may be required in calculating (and thus estimating) provisions for bad debts; provisions for inventory obsolescence, the fair value of financial assets or financial liabilities, rates of depreciation and amortisation (the useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable assets); and warranty obligations.

Some of the estimates are straight forward and quite accurate as a result of which changes in these estimates are quite infrequent, others are complex and as a result inherently inaccurate. So by nature disclosing changes in estimates is not that logical, but the impact (combined with infrequency) may be of such an magnitude that based on materiality it becomes useful information to be disclosed in the notes to the financial information.

Because of importance of estimates and the judgements applied in calculating these estimates in the preparation of financial statements, IAS 1 122 / IAS 1 125, includes disclosure requirements of key assumptions concerning the future and key sources of estimation uncertainty at the balance sheet date that carry significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year. (see below disclosure example)

Change in accounting estimate (IAS 8 32 – 39) is an accounting rule which is easily explained in a few captions of bullet points.

The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in: [IAS 8 36]

  1. the period of the change, if the change affects that period only; or Change in accounting estimate
  2. the period of the change and future periods, if the change affects both.Change in accounting estimate

However, to the extent that a change in an 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 37]

Change in accounting estimate


  • Use of estimates is an integral process of the accounting process.
  • Use of estimates is in line with matching concept and conservatism concept
  • Use of estimate is needed due to the inherent uncertainties in business activities
  • There is a need to revise the estimate due to changes in circumstances on which the estimate was based or as a result of new information, more experience or subsequent developments.

Examples of changes in accounting estimates include:

Impact of a change in accounting estimate affects:

  • would generally involve no prior period recalculation and impact only the current reporting period, or
  • the current period and future periods of the change in the estimate if the change affects both.

An example of a change in an accounting estimate affecting latest reporting period is a bad trade debtor under-provided

An example of a change in an accounting estimate affecting both the current reporting period and the future period(s) of the change in the estimate is a change in the estimate of the useful life of a fixed asset where the effect is applied prospectively by allocating the carrying amount of the fixed asset over the current and future periods during the remaining useful life of the asset.

Example affecting the latest reporting period

In 2004, Company ABC has provided for claim expenses of €600,000 in respect of an installation work done for a customer. However, due to negligence, the company had to agree to improve/repair a certain technical fault.

In the current year ended 31 st Dec 2005, the amount incurred to fix the technical fault was €800,000.

The provision was understated at the end of 2004, the underprovision of €200,000 will be recorded as a claim expense in profit or loss in 2005.

Examples affecting the current reporting period and future periods

A machine bought in 2003 for €1,000,000 is depreciated on a straight line basis over 10 years. Its company’s policy to charge a full year depreciation in the year of purchase.

In the current year 2005, management came to the conclusion that the useful life should have been 6 years.

The machine was depreciated for two tears, 2003 and 2004. The net book value as at 1 January 2005 was €800,000 (€1,000,000 -/- €100,000 (depreciation 2003) -/- €100,000 (depreciation 2004)). The revised (remaining) useful life as at 1 January 2005 is changed from 8 years (of 10 years 2 years are consumed) to 4 years (of 6 years 2 years are consumed). The change in estimate is not retrospectively adjusted in 2003 and 2004.

The depreciation in 2005 is €200,000 (net book value €800,000 / 4 years).

Disclosures Annual report and accounts 2018 Balfour Beatty

Change in accounting estimate
HK$5.5 billion contract to construct the final stages of the Lyric Theatre Complex (artist’s impression).

Balfour Beatty is a leading international infrastructure group, providing the structures and services that underpin daily lives, support communities and enable economic growth. The Group finances, designs, develops, builds and maintains complex infrastructure. It works across sectors such as transportation, power, utilities, and social and commercial buildings, and delivers projects across three main geographies: the UK, the US and Hong Kong.

2 Principal account policies

2.27 Judgements and key sources of estimation uncertainty

The preparation of consolidated financial statements under IFRS requires management to make judgements, estimates and assumptions that affect amounts recognised for assets and liabilities at the reporting date and the amounts of revenue and expenses incurred during the reporting period. Actual outcomes may differ from these judgements, estimates and assumptions.

Something else -   IAS 8 Best summary policies estimates and errors

The judgements, estimates and assumptions that have the most significant effect on the carrying value of assets and liabilities of the Group as at 31 December 2018 are discussed below.

All the below are both judgements and estimates made by the Group.

a) Revenue and margin recognition
The Group’s revenue recognition and margin recognition policies, which are set out in Notes 2.4 and 2.5, are central to how the Group values the work it has carried out in each financial year.

These policies require forecasts to be made of the outcomes of long-term construction services and support services contracts, which require both estimates and judgements to be made of both cost and income recognition on each contract. On the cost side, estimates of forecasts are made on the final out-turn of each contract in addition to potential costs to be incurred for any maintenance and defects liabilities.

On the income side, estimates and judgements are made on variations to consideration which typically include variations due to changes in scope of work, recoveries of claim income from customers, and potential liquidated damages that may be levied by the customer. The Group’s estimates also include assessments of recoveries from insurers.

Judgements and estimates are reviewed regularly throughout the contract life based on latest available information and adjustments are made where necessary.

In the construction portfolio there are a small number of long-term and complex projects where the Group has incorporated judgements over contractual entitlements. The range of potential outcomes as a result of uncertain future events could result in a materially positive or negative swing to profitability and cash flow. These contracts are primarily within the Group’s major infrastructure business units in the UK, US and Gammon.

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b) Taxation
The Group is subject to tax in a number of jurisdictions and judgement is required in determining the worldwide provision for income taxes. The Group provides for future liabilities in respect of uncertain tax positions where additional tax may become payable in future periods and such provisions are based on management’s assessment of exposures.

This may involve a significant amount of judgement as tax legislation can be complex and open to different interpretation in particular in relation to the basis of taxation on one-off or unusual transactions. Management uses both in-house and external tax experts and previous experience when assessing tax risks. These judgements are prone to changes in future periods.

Each potential liability or contingency is revisited annually, and where actual expected tax liabilities differ from the provisions, adjustments are made which can have a material impact on the Group’s profit for the year. Change in accounting estimate Change in accounting estimate

Deferred tax liabilities are generally provided for in full and deferred tax assets are recognised to the extent that it is probable that future taxable profit will arise against which the temporary differences will be utilised. Management judgement is required to determine the amount of deferred tax assets that can be recognised based on the likely timing and level of future taxable profits. Refer to Note 27.  Change in accounting estimate

c) Non-underlying items Change in accounting estimate
Non-underlying items are items of financial performance which the Group believes should be presented separately on the face of the income statement to assist in understanding the underlying financial performance achieved by the Group. Determining whether an item is part of underlying items or non-underlying items requires judgement. Certain items within non-underlying also require a degree of estimation. A total non-underlying loss after tax of £44m was charged (2017: £25m credited) to the income statement for the year ended 31 December 2018. Refer to Note 10.

d) Impairment of goodwill Change in accounting estimate
Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which the goodwill has been allocated. The value in use calculation requires an estimate to be made of the timing and amount of future cash flows expected to arise from the cash-generating unit and the application of a suitable discount rate in order to calculate the present value. Change in accounting estimate

A nominal growth rate, based on real GDP growth plus CPI inflation, is used to calculate a terminal growth multiple in accordance with the Gordon Growth Model. The discount rates used are based on the Group’s weighted average cost of capital adjusted to reflect the specific economic environment of the relevant cash-generating unit. Judgement is also required when determining the appropriateness of these assumptions as well as the underlying cash flows and the timing at which they arise. Change in accounting estimate

The carrying value of goodwill at 31 December 2018 was £903m (2017: £874m). Refer to Note 14. Change in accounting estimate

e) Financial assets measured at fair value through OCI Change in accounting estimate
At 31 December 2018, £1,898m (2017: £2,006m) of PPP financial assets constructed by the Group’s subsidiary, joint venture and associate companies were classified as financial assets measured at fair value through OCI. In the operational phase the fair value of these financial assets is measured at each reporting date by discounting the future value of the cash flows allocated to the financial asset. A range of discount rates is used from 4.2% to 7.8% (2017: 2.2% to 7.7%), which reflects the prevailing risk-free interest rates and the different risk profiles of the various concessions. Refer to Note 38. Change in accounting estimate

A £5m gain was taken to other comprehensive income in 2018 (2017: £63m gain) and a cumulative fair value gain of £274m had arisen on these financial assets as a result of market-related movements in the fair value of these financial assets at 31 December 2018 (2017: £269m gain). Change in accounting estimate

f) Provisions Change in accounting estimate Change in accounting estimate
Provisions are liabilities of uncertain timing or amount and therefore in making a reliable estimate of the quantum and timing of liabilities judgement is applied and re-evaluated at each reporting date. The range of potential outcomes as a result of uncertain future events could result in a materially positive or negative swing to profitability and cash flow.

Something else -   IFRS 3 Measurement period complete explanations

More specifically on the Group’s provisions set aside for any liabilities arising due to defects, there is a latent defect period for which the provision is held, but where there are known identified issues then the provision may be required to cover rectification work over a more extended period. Change in accounting estimate

The Group recognised provisions at 31 December 2018 of £316m (2017: £292m). Refer to Note 25. Change in accounting estimate

g) Retirement benefit obligations Change in accounting estimate
Details of the Group’s defined benefit pension schemes are set out in Note 28, including tables showing the sensitivity of the pension scheme obligations and assets to different actuarial assumptions. Change in accounting estimate Change in accounting estimate

At 31 December 2018, the net retirement benefit assets recognised on the Group’s balance sheet were £54m (2017: £32m). The effects of changes in the actuarial assumptions underlying the schemes’ obligations and discount rates and the differences between expected and actual returns on the schemes’ assets are classified as actuarial gains and losses. During 2018, the Group recognised net actuarial gains of £21m (2017: £246m) in OCI, including its share of the actuarial gains and losses arising in joint ventures and associates. Change in accounting estimate

In 2018, the Group recognised additional liabilities following the judgment on the Lloyds Banking Group High Court hearing on Guaranteed Minimum Pension (GMP) equalisation which was published on 26 October 2018. The judgment indicated that pension trustees needed to amend scheme benefits to equalise for the effect of unequal GMPs and indicated an acceptable range of methods for how to do so. Change in accounting estimate

This recent judgment therefore creates an obligation to equalise for both the BBPF and RPS schemes. The effect of GMP equalisation which amounted to £28m has been recognised in the Group’s income statement as a plan amendment. The Group has also treated this item as non-underlying due to the size and nature of the income statement charge. Any future changes in relation to GMP equalisation will be treated as part of the Group’s actuarial gains/losses which are recognised within OCI. Refer to Note 28.1. Change in accounting estimate

Change in accounting estimate

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Something else -   Change in accounting policy?

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