Adjusting entries made by companies each period often involves the use of estima

Question

     Adjusting entries made by companies each period often involves the use of estimates. Examples would include calculating depreciation of long-lived assets, determining the amount of accounts receivable that are uncollectible, or estimating the impairment of assets that are no longer worth the amount paid for them. How does the use of estimates affect the financial statements of a company? In your opinion, does the use of estimates create opportunities for companies to manipulate financial reporting?   

Explanation / Answer

Estimates, assumptions or the exercise of discretion mainly relate to the useful life of noncurrent assets, the discounted cash flows used for impairment testing and purchase price allocations, and the recognition of provisions, including those for litigation-related expenses, pensions and other benefits, taxes, environmental compliance and remediation costs, sales allowances, product liability and guarantees. Essential estimates and assumptions that may affect reporting in the various item categories of the financial statements Estimates are based on historical experience and other assumptions that are considered reasonable under given circumstances. They are continually reviewed but may vary from the actual values. Impacts are follwoing:

b) Employee benefits: The valuation of the various pension plans is based on a methodology using some parameters, including the expected discount rate, rate of compensation and pension increase, and return on plan assets. If the relevant parameters develope materially differently than expected, this could have a material impact on the company

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