Consider the following extract from the financial statements of a large furniture retailer:

Property, plant and equipment Plant and equipment assets are stated at historical cost less accumulated depreciation and any accumulated impairment losses. Land and buildings are measured at fair value less accumulated depreciation on buildings and leasehold land and any impairment losses recognised at the date of the revaluation. Valuations are performed frequently to ensure that the fair value of a revalued asset does not differ materially from its carrying amount.

Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:

• Land – not depreciated

• Leasehold land – lease term

• Buildings under construction – not depreciated

• Buildings – 10 to 50 years

• Owned plant and equipment – 3 to 20 years

• Plant and equipment under finance lease – 1 to 20 years.

The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end.

1 List any judgements that need to be made by management that will have an effect on the income statement and on the balance sheet of the retailer.

2 Why is it important that these judgements be disclosed to users of financial statements?