In preparing the financial statements, the directors may be required to make judgements, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income, and expenses.
The key sources of judgements and estimation uncertainty that may have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year include:
1. Useful Lives and Residual Values of Cinema Equipment and Fit-Out
The cinema’s projection, sound, seating, and concessions equipment represent a significant portion of fixed assets. Management estimates their useful lives and residual values based on expected usage, wear and tear, and technological obsolescence. Changes in cinema technology or customer expectations may affect these estimates and lead to earlier impairment or replacement.
2. Valuation of Stock (Concessions)
Stock primarily consists of food and beverage items sold at the concession stand. Estimates are applied in determining the net realisable value, particularly for perishable or slow-moving items. Obsolescence reviews are conducted regularly and require judgement around expected sales and shelf-life.
3. Revenue Recognition – Advance Ticket Sales and Memberships
For advance ticket sales and membership subscriptions, revenue is deferred and recognised when the service (e.g. screening or benefit) is provided. Estimating the appropriate allocation over time, especially for annual memberships with varying benefit usage, involves management judgement.
4. Impairment of Trade Debtors
The directors assess the recoverability of Trade Debtor balances by reviewing historical payment patterns and external financial conditions. Where there is evidence of credit risk, a provision is made, requiring estimation of the likely recovery amount.
5. Provisions and Accruals
Accruals for utilities, rights fees, or staff costs are based on best estimates at the reporting date, often before final invoices are received. Provisions, if required, such as for ticket refunds or disputes, involve uncertainty regarding outcome and timing.