Accounting Business Reporting for Decision Making

226 Accounting: Business Reporting for Decision Making

Figure 6.1 compares the depreciation patterns over the three years by showing the carrying value of

the asset at the end of each of the three years for different depreciation methods. Under the straight-line

method, with an equal depreciation expense each year, the asset’s carrying value reduces evenly over

each of the three years. Under the diminishing balance method, with higher depreciation expense in

earlier than in later years, the carrying value reduces at a faster rate in earlier years relative to the out-

come of straight-line depreciation. Under the units of production method, with the depreciation expense

varying with the usage each year, the reduction in carrying value each year is dependent on the asset’s

usage that year.

5 000

0

0 1 2 3

10000

15000

20000

25000

30000

35000

Units of production

Straight-line

Diminishing balance

Carrying value ($000s)

Asset life (years)

FIGU R E 6.1 Patterns of depreciation

As just demonstrated through the depreciation example, an entity’s accounting choices, estimates

and judgements will affect the profit or loss figure. This also has implications for balance sheet items.

For example, depreciation expense affects accumulated depreciation, which in turn affects the carrying

amount of the asset.

Other examples of estimations that affect the magnitude of expenses recognised in the statement of

profit or loss in a particular reporting period, and balance sheet items, include estimating any impaired

accounts receivable, estimating costs associated with a well-planned and well-documented business

restructure, and estimating the expense in a particular period associated with employee benefits (e.g.

long service leave and sick leave).

When reviewing the financial statements, a user must be cognisant of the particular accounting poli-

cies used, and of financial numbers that involve preparer estimations. Many accounting policy choices

are transparent, as reporting entities are required to disclose such choices. However, entities are not

obliged to detail all estimations used to derive various items recognised in the financial statements. 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 JB Hi-Fi Ltd’s depreciation

policy.