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Synergy Ltd had a practice of making a provision on slow moving stock based on the usage and elapse of time. However during the current year, the management wants to change the same and make a provision based on technical evaluation.
Does this amount to a change in accounting policy or accounting estimate? Justify your answer.
This amounts to change in accounting policy because your management has changed the basis of provision, now the policy has changed so effect will be taken retrospectively in current year ans previous years Retained Earning as well.
This will amount to change in Accounting policy not Accounting estimate. Naturally if management wants to change a system, its about policy. However if the policy works with specific provisions in Accounting estimates, then it requires change in the account estimates too.
It is a change in Accounting estimate , Accounting policy is that you have to make the allowance for slow moving stock in order to have a fair view of your financial position and Performance.
Just take an other example , we depreciate the assets , charging depreciation is a policy but on what basis or method it is an estimate .
So in your case your are changing the estimate for making an allowance/provision , which will not affect your previous years figures.
It's a change in accounting estimate and will not affect the financial statements of previous years.
The decision of making a provision for non-moving stocks on the basis of technical evaluation does not amount to change in accounting policy. Accounting policy of a company may require that provision for non-moivng stocks should be made. The method of estimating the amount of provision may be changed in case a more prudent estimate can be made. Hence it is a change in Accounting Estimate.
