CHAPTER 5 Balance sheet 163VALUE TO BUSINESS• The balance sheet is one of the financial statements prepared at the end of the reporting period.
It details the assets, liabilities and equity of the entity as at the end of the reporting period. This
information helps users to assess the entity’s financial solvency and stability.
• The balance sheet reflects the assets in which the entity has invested (investing decisions) and how
the entity has financed the assets (financing decisions).5.3 Accounting policy choices, estimates
and judgements
LEARNING OBJECTIVE 5.3 Outline the effect of accounting policy choices, estimates and judgements
on financial statements.
In introducing the balance sheet, we have presented a balance sheet for ATC, an entity that is not required
to prepare financial statements, and the Qantas Group, a group that is required to prepare general pur-
pose financial statements in compliance with accounting standards. In this, and subsequent chapters,
some of the key recognition, presentation and disclosure requirements for financial statements elements
contained in accounting standards are explored. JB Hi-Fi Ltd’s financial statements will be used to illus-
trate these requirements. The financial statements for many listed entities are available from the entities’
websites. JB Hi-Fi Ltd’s financial statements can be accessed at http://www.jbhifi.com.au, or alternatively may
be accessed through databases that provide annual reports for listed companies such as those found at
a university library. The relevant financial statements and notes for JB Hi-Fi Ltd are reproduced in the
appendix to this text.
Even when preparing financial statements in compliance with accounting standards, such as IFRS, the
accounting standards provide preparers with choices. Therefore, most items in the financial statements
involve the exercise of judgement and estimations on behalf of preparers. Users of financial statements
need to appreciate that accounting flexibility and discretion exist, and to consider the potential impact
this has on reported information in the balance sheet and statement of profit or loss.
We will explore some of the permissible choices in the recording of transactions and estimations and
judgements required by preparers. Accounting choices applied to the recognition and measurement of
elements in the financial statements are referred to as accounting policies. This is why an analysis of
an entity’s accounting policies is important. There are numerous accounting rules that permit choices.
Examples include the alternative methods of costing inventory, the measurement of property, plant and
equipment subsequent to its acquisition, the method for calculating depreciation, and the treatment of
development expenditure as an asset (known as capitalisation) or as an expense.
Examples of estimations that affect the values reported on the balance sheet include the impairment of
accounts receivable, the costs associated with a well-planned and documented business restructure, and
the liabilities related to employee benefits (e.g. long service leave and sick leave entitlements). When
reviewing financial statements, a user must be cognisant of the particular accounting policies used, and
of financial numbers that involve preparer estimations. Many accounting policy choices are transparent,
as accounting standards require disclosure of such choices. However, entities are not obliged to detail
all estimations used to derive various financial statement elements. For a listed entity such as JB Hi-Fi
Ltd, the accounting policy disclosures are usually in the first few notes accompanying the financial
statements. Reality check ‘JB Hi-Fi Ltd Notes to the financial statements for the financial year ended
30 June 2015’ is an extract of disclosures relating to accounting policies, estimates and judgements.
The extract details the basis on which the financial statements have been prepared, recognising that the
financial statements involve critical estimates and providing an example of where significant judgement
is exercised.