Sample Disclosure – Significant Accounting Estimates and Judgements (7 December 2008)
SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGEMENTS
a) Critical judgements made in applying accounting policies
The following is the judgements made by management in the process of applying the Group’s accounting policies that have most significant effect on the amounts recognised in the financial statements:
As disclosed in note xx, a subsidiary company has entered into Settlement Agreement with a trade debtor to acquire two parcels of vacant land as full settlement of the outstanding amount of RMx,xxx,xxx as at the end of the financial year.
As at the date of this report, the transaction has not been completed. In light of the transaction not been completed, the directors are required to consider whether allowance for doubtful debts are required to be made on the outstanding balance.
No allowances for doubtful debts have been made for these balances as the directors are of the view that the transaction will be completed and any outstanding amount will be able to collect from the suppliers concerned.
b) Key sources of estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:
(i) Depreciation of property, plant and equipment
The estimates of the residual values, useful lives and related depreciation charges for its property, plant and equipment are based on commercial and production factors which could change significantly as a result of technical innovations and competitors’ actions in response to the market conditions.
The Group and the Company anticipate that the residual values of its property, plant and equipment to be insignificant. As a result, residual values are not being taken into consideration for the computation of depreciable amount.
The depreciation charge will increase when useful lives are less than previously estimated.
(ii) Income taxes
There are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group and the Company recognise tax liabilities based on estimates of whether additional taxes will be due. Where the final outcome of these matters is different from the amounts that were initially recognised, such difference will impact the income tax and deferred tax provisions in the period in which such determination is made.
(iii) Allowance for doubtful debts
The collectibility of receivables is assessed on an on going basis. An allowance for doubtful debts is made for any account considered to be doubtful of collection.
The carrying amount of the Group’s receivables as at the end of the financial year was RMxx,xxx,xxx (2007 – RMxx,xxx,xxx).
Allowance for doubtful debts is made based on a review of all outstanding accounts as at the balance sheet date. A considerable amount of judgement and estimate is required in assessing the ultimate realisation of these receivables, including the creditworthiness, the past collection history of each customer and subsequent collection up to date of report. If the financial conditions of customers of the Group were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
(iv) Inventories obsolescence and inventories write down
Inventories are stated at the lower of cost and net realisable value. The Group estimates the net realisable value of inventories based on an assessment of committed sales prices.
Inventories are reviewed on a regular basis and the Group will make allowance for excess or obsolete inventories and write down to net realizable value based primarily on historical trends and management estimates of expected and future product demand and related pricing.
The carrying amount of the Group’s inventories as at the end of the financial year was RMxx,xxx,xxx (2007 – RMxx,xxx,xxx).
Demand levels, exchange rates, technological advances and pricing competition could change from time to time. If such factors result in an adverse effect on the Group’s products, the Group may be required to reduce the value of its inventories and additional allowance for slow moving inventories may be required