Disclosures Critical estimates judgements and errors in IAS 8

Critical estimates judgements and errors

The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the group’s accounting policies. (IAS 1.122, IAS 1.125)

This note provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be wrong. Detailed information about each of these estimates and judgements is included in other notes together with information about the basis of calculation for each affected line item in the financial statements.

In addition, this note also explains where there have been actual adjustments this year as a result of an error and ofCritical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors changes to previous estimates.

[Entities with operations in the UK, or that are doing a significant amount of business with the UK, should consider the extent to which additional disclosures are necessary to explain the impact of Brexit-related risks on their financial statements arising from the UK’s Brexit decision, see below.]

(a) Significant estimates and judgements

The areas involving significant estimates or judgements are disclosed in other areas of the notes to facilitate a complete overview of each IFRS subject/Note disclosure. These significant estimates or judgements are:

  • estimation of current tax payable and current tax expense in relation to an uncertain tax position – note 6(b)
  • estimated fair value of certain financial assets – notes 7(c) and 7(h)
  • estimation of fair values of land and buildings and investment property – notes 8(a) and 8(c)
  • estimation uncertainties and judgements made in relation to lease accounting – note 8(b)
  • estimated goodwill impairment – note 8(d)
  • estimated useful life of intangible asset – note 8(d)
  • estimation of defined benefit pension obligation – note 8(h)
  • estimation of provision for warranty claims – note 8(i)
  • estimation of fair values of contingent liabilities and contingent purchase consideration in a business combination – note 14
  • recognition of revenue and allocation of transaction price – note 3
  • recognition of deferred tax asset for carried-forward tax losses – note 8(e)
  • impairment of financial assets – note 12(c), and
  • consolidation decisions and classification of joint arrangements – notes 7(c) and 16.

Estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances.

11(b) Correction of material error in calculating depreciation

In September 2020, a subsidiary discovered a computational error in calculating depreciation of some its equipment. The error resulted in a material understatement of depreciation recognised for the 2019 and prior financial years and a corresponding overstatement of property, plant and equipment. (IAS 8.49(a))

The error has been corrected by restating each of the affected financial statement line items for the prior periods as follows: (IAS 8.49(b)(i),(c))

Balance sheet

(only relevant reporting lines)

(Amounts in CU’000)

31 December 2019

Increase/ (Decrease)

31 December 2019 (Restated)

31 December 2018

Increase/ (Decrease)

1 January 2019 (Restated)

Property, plant and equipment

103,630

-1,550

102,080

94,445

-1,300

93,145

Deferred tax liability

-7,285

465

-6,820

-4,745

390

4,355

Net assets

117,084

-1,085

115,999

95,818

-910

94,908

Retained earnings

-35,588

1,085

-34,503

-21,115

-10

20,205

Total equity

-117,084

1,085

-115,999

-95,818

910

-94,908

Statement of profit or loss

(only relevant reporting lines)

(Amounts in CU’000)

2019

Profit Increase/ (Decrease)

2019 (Restated)

Cost of sales of goods

-64,909

-250

65,159

Profit before income tax

39,925

-250

39,675

Income tax expense

-11,650

75

-11,575

Profit from discontinued operation

399

399

Profit for the period

28,616

-175

28,441

Profit is attributable to:

– Owners of RePort Plc

Non-controlling interests

26,297

2,318

-175

26,123

2,318

28,616

-175

28,441

Statement of comprehensive income

(only relevant reporting lines)

(Amounts in CU’000)

Profit for the period

28,616

-175

28,441

Other comprehensive income for the period

3,665

3,665

Total comprehensive income for the period

32,281

-175

32,106

Total comprehensive income is attributable to:

– Owners of RePort Plc

– Non-controlling interests

29,705

2,576

-175

29,530

2,576

32,281

-175

32,106

Basic and diluted earnings per share for the prior year have also been restated. The amount of the correction for basic and diluted earnings per share was a decrease of CU0.4 and CU0.3 cents per share respectively. (IAS 8.49(b)(ii))

The correction further affected some of the amounts disclosed in note 5(c) and note 6(a). Depreciation expense for theCritical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors  Critical estimates judgements and errors prior year increased by CU250,000, and deferred tax expense decreased by CU75,000.

11(c) Revision of useful lives of plant and equipment

During the year the estimated total useful lives of certain items of plant and equipment used in the manufacture of furniture at a subsidiary were revised. The net effect of the changes in the current financial year was an increase in depreciation expense of CU980,000. (IAS 8.39, IAS 16.76)

Assuming the assets are held until the end of their estimated useful lives, depreciation in future years in relation to these assets will be increased/(decreased) by the following amounts:

CU’000

2021

740

2022

-610

2023

-460

2024

-650

Critical estimates, judgements and errors – Guidance

Disclosure not illustrated: not applicable to RePort Plc

Sources of estimation uncertainty

The recognition of a net defined benefit asset may also warrant additional disclosures. For example, the entity should explain any restrictions on the current realisability of the surplus and the basis used to determine the amount of the economic benefits available. (IFRIC 14.10)

Significant judgements

Examples of significant judgements that may require disclosures are judgements made in determining: (IAS 1.123)

  1. when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other entities
  2. whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue
  3. whether the contractual terms of a financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding
  4. whether an asset should be classified as held-for-sale or an operation meets the definition of a discontinued operation
  5. whether multiple assets should be grouped to form a single cash-generating unit (where this would affect whether an impairment is recognised)
  6. whether there are material uncertainties about the entity’s ability to continue as a going concern.

Another example of judgements that may need to be explained are judgements made by the entity about the possible impact of climate-related and other emerging business risks. This will be the case in particular if investors could reasonably expect that climate-related risks (or other emerging business risks) could affect the amounts and disclosures in the financial statements.

In these circumstances, entities may need to explain, for example, why they have concluded that they do not need to factor climate-related risks into their impairment testing assumptions. Refer to the webpage on IAS 37 Climate Risk Reporting and climate-related disclosures for further information.

Change of accounting estimate in final interim period

If an estimate of an amount reported in an interim period is changed significantly during the final interim period of the annual reporting period but separate financial statements are not published for that final interim period, the nature and amount of that change in estimate shall be disclosed in a note to the annual financial statements for that annual reporting period. (IAS 34.26)

Brexit

RePort Plc does not have any subsidiaries that are incorporated in the UK and is not doing any significant business with the UK or in Europe. Entities with operations in the UK or Europe should consider whether the exit of the UK from the European Union (Brexit) could affect any estimations or judgements made in the preparation of the financial statements. If you have significant exposure you should explain judgements taken and assumptions made in determining the impact.

This should include comments on how Brexit has been factored into your impairment calculations and valuations. You will also need to consider whether the impact of events that occur between the year end and the date of signing the financial statements would require either an adjustment to the amounts recognised at period end or disclosure only, or whether the ability of the entity to continue as a going concern is called into question.

If you plan to restructure your business, or have already commenced to do so, you may need to recognise additional provisions. The accounting for group restructurings in individual financial statements can be complex and we recommend careful planning. There could also be an impact on ability to pay dividends which needs to be factored by the parent entity in its own financial planning. In terms of tax, there could be significant changes to the tax law that applies to UK and EU companies which may affect, for example, the recoverability of deferred tax assets and other tax balances.

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Critical estimates judgements and errors

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