Question
Is it appropriate to use high risk accounting estimates in GAAP reporting? Can you identify conditions under which they would not be appropriate? - Justify
Is it appropriate to use high risk accounting estimates in GAAP reporting? Can you identify conditions under which they would not be appropriate?
- Justify your answer by referring to key parts of the conceptual framework of the general purpose financial reporting standards you are using.
- Do the note disclosures for high risk estimates need to be auditable? Why or why not?
- Give an example of an appropriate and auditable note disclosure involving ranges of estimates using your analysis for this case? (1.5 marks)
When you think you have done all you can to audit the client's franchise rights, consider the following quote by the best experts in practical business forecasting:
Augment the range of uncertainty. Chances are good that you've just underestimated the range of uncertainty, no matter how realistic you thought you were when you assessed it. Extensive empirical evidence shows that people consistently underestimate uncertaintytheir powers of imagination are usually worse than their powers of mathematics. We have advice for those who'd like to stretch their imaginations, but if you are not feeling creative, we have a rule of thumb: if you have a small amount of historical data that's relevant for modeling the future, double the distance between the largest and smallest observations. Why? Well, to estimate a range accurately, you need to observe values at the two extremes. However, by definition, extreme values occur only rarely, so you are unlikely to observe them in small samples. Doubling what you've observed in a limited number of past occurrences is a crude way of estimating, say, the 95% range.
On the other hand, if you have a wealth of past data (on oil prices, for example), you may not need to double your range. However, we'd still recommend multiplying it by at least 1.5.
"Why Forecasts Fail, and What to Do Instead." Rotman Magazine, Fall 2010: pages 70-71, by S. Makridakis, R. Hogarth, and A. Gaba. This is the same guidance as in your required reading for class 7.
In your conclusion, comment on how the above excerpt may affect your estimate. Will this suggestion address overconfidence in assessing a range? Briefly discuss.Also comment on what is the effect of using 2017 data as instructed in section 1 above, compared to 2008 assumptions of Roman Holiday.
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