Accounting estimates ( brilliant real-life examples)

Usually, when we interpret financial statements, we only look at the P&L, Balance sheet and cash flow statements with little attention on the Disclosure notes.

In fact, the notes contain information that might explain why the figures and ratios changed over time. Those who are writing their Research project for Oxford Brookes University diploma, should spend quality time analyzing most ( if not all) the aspects of the Disclosure notes if a higher mark is desired.

Chelsea FC

Chelsea FC used the knowledge of amortization ( taught in FR) to spread the contract of a player over 8 years. Imagine, signing Cole Palmer for a contract of 8 years ( for a total of 120,000,000 pounds) and spreading the total fee over 8 years. It is not common for a footballer to stay in one club for 8 years ( unless his name is Kross or Reus). Chelsea frequently held such contracts so that the annual amortization expenditure is lower than it would be under current Premier League rules of maximum 5 years amortization.

How is the above case related to ACCA FR syllabus? You got it, it is the use of Accounting estimates to determine the useful life of the asset ( in our example, the asset is a footballer). As there is no definite rule on the useful life of all assets, companies have some flexibility to use this opportunity for their own benefit.

Netflix

Everyone has heard of Netflix and the movies in it. How to account for the expenses related to producing content? It takes time to produce content and that content generates economic benefit. A close definition of asset, at least development cost, isn`t it?

However, unlike development costs and the assets that you can see in the ACCA syllabus, there is no clear cut rule of accounting in real life, when the Netflix is the subject of our talk. Because, it is not easy to determine how many years can one movie generate profits. As Netflix depends primarily on Content creation, such costs are usually over 10-20 billion dollars annually and the amortization policy has a huge impact on Netflix`s annual profits))).

I read this article yesterday from AB magazine and wanted to share some more insights with you. You can read the whole article here https://ab.accaglobal.com/2024/04/18/usefulness-of-useful-life-2/content.html

Broadening your horizon with out-of-textbook ideas like these will help you both in your exam and real life!!