The Importance of Accounting Policies, Estimation Changes, and Error Rectification in Asset Management

André Gonçalves de Freitas

André Gonçalves de Freitas

Mar 26, 20244 min read

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The Importance of Accounting Policies, Estimation Changes, and Error Rectification in Asset Management

Introduction:

In the world of finance and accounting, it is crucial for entities, both public and private, to have a clear understanding of their accounting policies, estimation changes, and the rectification of errors. These aspects play a vital role in managing assets effectively and ensuring accurate financial reporting. In this article, we will explore the significance of these concepts and how they are interconnected.

Accounting Policies:

Accounting policies are a set of principles, rules, and procedures that guide the preparation and presentation of financial statements. These policies provide consistency in reporting and enable stakeholders to make informed decisions. They outline the methods used to recognize, measure, present, and disclose various items in the financial statements.

One critical aspect of accounting policies is the assessment of impairment. Impairment occurs when the carrying amount of an asset exceeds its recoverable amount. This can happen due to various factors such as a significant decrease in the asset's market value, changes in technological advancements, or adverse changes in the economic environment.

Estimation Changes:

Estimation changes refer to the revision of previously determined estimates due to new information or circumstances. In asset management, estimation changes can have a significant impact on financial statements, particularly in determining the recoverable amount of assets. Entities must regularly review and update their estimates to reflect the most accurate and reliable information available.

For example, consider a public entity with two assets classified as property, plant, and equipment. At the end of the reporting period, there were indications that these assets might have suffered a decrease in their recoverable amounts. This could be due to changes in market conditions or technological advancements. By reassessing and making necessary estimation changes, the entity can ensure the assets are stated at their recoverable amounts, avoiding potential overstatement of their values.

Rectification of Errors:

Errors in financial reporting can occur due to various reasons, such as mathematical mistakes, misinterpretation of facts, or oversight. Rectifying these errors is essential to maintain the accuracy and reliability of financial statements. The International Financial Reporting Standards (IFRS) provide guidelines on how errors should be corrected.

When an error is identified, it should be rectified retrospectively, which means adjusting the financial statements for the period in which the error occurred. This ensures that the financial statements are presented in a manner that reflects the true financial position and performance of the entity. Rectification of errors also includes disclosing the nature and impact of the error in the financial statements.

Interconnection of Concepts:

The concepts of accounting policies, estimation changes, and the rectification of errors are closely interconnected. Accounting policies provide the framework for recognizing and measuring assets, including determining their recoverable amounts. Estimation changes, on the other hand, are essential in ensuring that assets are stated at their most accurate recoverable amounts, considering any changes in market conditions or technological advancements. Finally, the rectification of errors is necessary to correct any misstatements that may have occurred due to errors in the application of accounting policies or estimation changes.

Actionable Advice:

  • 1. Regularly review and update accounting policies: It is crucial to stay updated with the latest accounting standards and guidelines to ensure that accounting policies are relevant and provide reliable financial information. Regularly review and update your accounting policies to reflect any changes in the business environment or regulatory requirements.
  • 2. Conduct periodic impairment assessments: Impairment assessments should be conducted on a regular basis to identify any potential reductions in the recoverable amounts of assets. This will help in ensuring that the financial statements accurately reflect the true value of assets and avoid potential overstatements.
  • 3. Implement robust internal controls: Having strong internal controls in place can help prevent errors in financial reporting. Implementing regular reconciliations, segregation of duties, and thorough review processes can minimize the occurrence of errors and ensure the accuracy of financial statements.

Conclusion:

Accounting policies, estimation changes, and the rectification of errors are essential components of effective asset management and accurate financial reporting. By understanding the interconnection between these concepts and implementing the actionable advice provided, entities can ensure the reliability and integrity of their financial statements. Regular review and updates of accounting policies, conducting impairment assessments, and implementing robust internal controls are key steps towards maintaining transparency and trust in the financial reporting process.

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