Question

Scenario 1: Based on the annual review of the expected pattern of consumption of the future economic benefits from its machine, Windermere plc has changed the depreciation method for the machine from the straight-line method to the diminishing balance method. Scenario 2: Windermere plc estimated the previous year's warranty provision as 1% of sales based on data of historical warranty claims. However, this year, due to increases in warranty claims last year, Windermere have estimated the current year's warranty provision as 1.5% of current year sales. REQUIRED For each of the above scenarios, identify whether it is a change in accounting policy, a change in accounting estimates or correction of errors. Further, describe how each of the above scenarios should be accounted for

Answer 1

1. Changing the method of depreciation such that it matches the flow of economic benefits in future, is a change in accounting estimate as it changes the carrying value of the asset over its life. For accounting purposes, the WDV from the year of change on wards will be charged at the rate under the Reducing Balance Method. Any change in the accounting estimate will not require the restatement of past financial statements or any retrospective adjustment of account balances.
2. Changes in percentage of expected warranty is purely a change in accounting estimate. For accounting purposes, warranty expense will be debited to warranty provisions at the new rate ie 1.5% of sales for the current year. Any change in the accounting estimate will not require the restatement of past financial statements or any retrospective adjustment of account balances.