Why organisations should provide estimation uncertainty disclosures

IFRS requires organisations to provide stakeholders with information on the assumptions that they make about the future and other sources of estimation uncertainty at the end of their reporting period. FILE PHOTO | SHUTTERSTOCK 

By AKINYEMI AWODUMILA More by this Author

An organisation provides estimation uncertainty disclosures when it has incomplete or imperfect information, often relating to the future.

IFRS requires organisations to provide stakeholders with information on the assumptions that they make about the future and other sources of estimation uncertainty at the end of their reporting period that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

The myriad challenges organisations have to navigate in the new year, ranging from macroeconomic instability, high inflation, rising interest rates, rising commodity prices, and increased geopolitical conflicts, to name a few, make it extremely difficult for organisations to make accurate predictions and forecasts about the future.

For example, some organisations with a reporting year-end of December 31, 2022, will have to conduct careful assessments on the use of the going concern assumption in the preparation of their financial statements, the fair values and recoverable amounts of assets and liabilities included in those financial statements based on an estimation of the future which covers the following calendar year 2023.

These disclosures enable users of the organisation’s financial statements to understand the judgments made by the organisation where there is estimation uncertainty.

Examples of these disclosures include the nature of assumptions used, the sensitivity of carrying amounts and the reasons for the sensitivity, the expected resolution of uncertainty and the range of possible outcomes within the next financial year in respect of the carrying amounts of the assets and liabilities affected.

Some sources of estimation uncertainty organisations could consider including in disclosures are as follows; the assumptions used in deriving the recoverable amount or fair value for property, plant and equipment owned by an organisation; the impact of technological obsolescence on inventory; the assumptions applied in estimating fair values of financial assets and financial liabilities that are measured and carried at fair value on the balance sheet.