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Questions and Answers
What must be considered when making fair value estimates during heightened uncertainties?
What must be considered when making fair value estimates during heightened uncertainties?
What is a common risk when making estimates during periods of uncertainty?
What is a common risk when making estimates during periods of uncertainty?
What approach should companies take to ensure the reliability of financial estimates during crises?
What approach should companies take to ensure the reliability of financial estimates during crises?
How is professional skepticism relevant in financial reporting estimates?
How is professional skepticism relevant in financial reporting estimates?
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What types of assets may require fair value estimates due to uncertainties?
What types of assets may require fair value estimates due to uncertainties?
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Why is adapting professional skepticism important during financial estimations?
Why is adapting professional skepticism important during financial estimations?
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Which statement is true regarding the estimates made during heightening uncertainties?
Which statement is true regarding the estimates made during heightening uncertainties?
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What type of assets could be included in assessing possible impairment due to uncertainties?
What type of assets could be included in assessing possible impairment due to uncertainties?
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What is a key consideration when assessing the going concern assumption of a company?
What is a key consideration when assessing the going concern assumption of a company?
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Which financial metric indicates potential sustainability issues for a business?
Which financial metric indicates potential sustainability issues for a business?
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What is essential for management to monitor during periods of uncertainty?
What is essential for management to monitor during periods of uncertainty?
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Which of the following is associated with the risk of material misstatements?
Which of the following is associated with the risk of material misstatements?
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How often should financial management monitor trading securities during uncertainties?
How often should financial management monitor trading securities during uncertainties?
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What does the concept of 'values formation' emphasize?
What does the concept of 'values formation' emphasize?
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Which of the following statements regarding estimates is false?
Which of the following statements regarding estimates is false?
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What is an important aspect of cash flow projections?
What is an important aspect of cash flow projections?
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What is a key concern regarding management's role in financial estimates during uncertainties?
What is a key concern regarding management's role in financial estimates during uncertainties?
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Which aspect of cash flow projections should be approached with certainty?
Which aspect of cash flow projections should be approached with certainty?
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What assets are specifically mentioned as needing testing for impairment in times of uncertainty?
What assets are specifically mentioned as needing testing for impairment in times of uncertainty?
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What is the implication of underestimating expenses by management?
What is the implication of underestimating expenses by management?
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Which statement is true regarding the treatment of goodwill?
Which statement is true regarding the treatment of goodwill?
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What must be included in cash flow projections if certain?
What must be included in cash flow projections if certain?
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What is the potential risk of not addressing impairment of fixed assets?
What is the potential risk of not addressing impairment of fixed assets?
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How can projected cash inflows be made more reliable?
How can projected cash inflows be made more reliable?
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Study Notes
Financial Reporting Updates - Lecture 03
- Lecture is about estimates in financial reporting
- Lecture 03, page 1
Summary of Previous Lesson
- Impact of Covid 19 on financial reporting
- Financial reporting of entities affected by Covid 19
- Information to disclose about assumptions used
- Other disclosures, page 3
Estimates During Heightened Uncertainties
- Estimates during heightened uncertainties are different from normal situations
- Fair value estimates are applicable if a company evaluates impairment of assets affected by uncertainties (financial assets,intangible assets, and property, plant, and equipment)
- page 4
Risk of Material Misstatement
- Risk of material misstatement exists when creating estimates during uncertainty periods
- This risk involves possible abuse of providing approximated figures
- Companies create independent committees to deliberate estimates (for example, by controllers) to avoid this risk
- The committee reports to the board. Page 5
Professional Skepticism
- Professional skepticism, although primarily applicable to auditors, also applies to making estimates
- Professional skepticism emphasizes a questioning attitude and alertness to conditions indicating possible misstatements from fraud or error
- Management should use this attitude whenever evaluating estimated amounts during business planning. Page 6
Accounting Estimates and Management Bias
- Stakeholders want to avoid management bias in times of uncertainty
- Management may try to inflate accruals of revenue or deflate accruals of expenses to improve reported financial performance
- The role of the board of directors as overseers is critical in estimating processes. page 7
Projections of Future Cash Flows
- Projections of cash flows are an important part of estimating future performance.
- Projected cash inflows should be based on the possibility of collected amounts
- If a company anticipates selling assets, that possible sale is essential information for cash flow analysis. The principle is applicable for asset acquisitions. page 8,9
- Estimates of cash inflow from investments should be certain. Page 9
Testing for Impairment of Non-Financial Assets
- Goodwill: Goodwill is not amortized, but tested for possible impairment. It is most likely to be impaired during uncertainty. Management needs to consider impairment of intangible assets, page 10
- Land and other affected assets: Impairment of land and other fixed assets values can happen if uncertainty significantly impacts their value. Civil war in Marawi City or an earthquake in Luzon are examples. Page 11
Effect of Uncertainties in Going Concern Assumption
- To determine the going concern assumption, consider these factors:
- Salability of products or services
- Adequacy of capital to cover risk assets
- Debt to equity ratio (high debt relative to equity could indicate potential sustainability issues if the business environment is not favorable.) Page 12
Market Behavior in the Period of Uncertainties
- Market behavior refers to changes in market prices of investment instruments (debt and equity securities)
- Management should actively monitor market price changes of financial assets. In uncertain times, monthly valuation and monitoring are appropriate
- Focus should be on Trading Securities. Page 13
Summary of Today's Lesson
- Estimates during heightened uncertainties
- Fair value estimates
- Possible risk of material misstatements
- Professional skepticism
- Management bias in estimates
- Cash flow projections
- Testing non-financial asset impairment
- Going concern assumption impact
- Market behavior effects page 14
Values Formation
- A quote about starting with the necessary, then the possible, and eventually doing the impossible. Page 15
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Description
This lecture focuses on the importance of estimates in financial reporting, particularly in the context of heightened uncertainties such as the Covid-19 pandemic. It examines the risks of material misstatement and the role of independent committees in ensuring accurate estimates. Gain insights into the necessary disclosures and fair value assessments related to financial assets and liabilities.