Who decides an asset's useful life — and why does the auditor keep asking about it?
Why does the auditor scrutinize accounting estimates like my bad-debt provision so closely? Isn't it just an estimate to begin with, not a hard number?
Under IFRS, accounting estimates are items that don't have a fixed, verifiable value and require management's judgment — the useful life and depreciation method of fixed assets, a provision for doubtful debts, provisions for legal risk or warranty claims, inventory obsolescence, and fair value for assets without a clear active market.
These estimates aren't minor details — they feed directly into reported profit and into equity on the balance sheet. A small shift in judgment — a slightly longer useful life on an asset, a smaller provision against a doubtful debt — can materially change the year's result, which opens the door to unintentional bias, or in the worst cases, deliberate manipulation to make the numbers look better.
That's why the auditor doesn't just ask about the number itself, but about the method and the reasoning behind it: are the assumptions the estimate is built on supported by actual evidence (an asset's real usage history, customers' actual collection behaviour) rather than just management's opinion? Has the same method been applied consistently from one year to the next without a clear justification for any change? And are there indicators that management has an incentive — such as a loan covenant tied to a specific profit level — that could push them toward a particular estimate?
Scrutinizing estimates closely isn't a challenge to management's intentions — it's a core part of making sure the financial statements reflect the business's actual reality rather than its best-case scenario. It's part of the work RASEEKH does for clients, whether during an audit or in reviewing the numbers before the books close.