Accounting: The Language of Business - Vol. 2 (Intermediate: Part 18)

Dark, subtle, complex, wicked - if only Hollywood movies were half as interesting as Hollywood accounting.

Stephen Metcalf

Judgement and Applied Financial Accounting Research (Part C)

by

Charles Lamson

IFRS-Specific Disclosures. Our discussion of required disclosures of significant accounting policies thus far applies to both IFRS and U.S. GAAP. IFRS further requires that companies disclose additional information about the assumptions and estimates they made at the end of the reporting period [See paragraphs 125-133 of IASC., International Accounting Standard I, "Presentation of Financial Statements" (London, UK; International Accounting Standards Committee, 1975, revised.)]

In Exhibit 3.2, Telefonaktiebolaget LM Ericsson, a Swedish technology, hardware, and equipment company and an IFRS reporter, stipulates in its second financial statement note that the preparation of its financial statement often involves management's judgment and the use of assumptions and estimates. Notice the distinction between the uncertainty in making estimates and the first bullet point and the judgment management made in applying the accounting policies in the second bullet point. Erikson's note continues to discuss 10 areas involving the use of estimates and assumptions, and four areas involving management's judgments in relation to accounting policies. The areas covered are trade and customer finance receivables; inventory valuation; deferred taxes; income tax, value added tax, and other taxes, intellectual property rights and other intangible assets; provisions; contingent liabilities; pensions; and foreign exchange risks. For example, in the revenue recognition section, Erikson explains that its managers made estimates in the amounts of provisions and the expected volume discounts and applied judgment in evaluating whether the firm could recognize revenue on its large and complex contracts. The section related to trade and customer finance receivables discloses that total allowances for uncollectible accounts were 2.0% of gross trade and customer finance receivables. As another example, Erikson details that its allowance for inventory write-downs was 8% of gross inventory.

EXHIBIT 3.2 Critical Accounting Estimates and judgments Note Excerpt. Telefonaktiebolaget LM Ericsson, December 31, 2015, Financial Statements

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 59-61*

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