It is an approximation of a financial statement element, item, or account in the absence of exact measurement.
“ ACCOUNTING ESTIMATE An approximation in a financial statement of the amount to be credited or debited on items for which there is no precise means of measurement, such as depreciable assets or provisions for a loss from a lawsuit. Estimates are based on the judgment and specialized knowledge derived from past experience. A change in accounting principles, accounting estimates, or the reporting entity. A change in an accounting principle is a change in a method used, such as using a different depreciation method or switching from LIFO to FIFO. An example of an accounting estimate change could be the recalculation of machine's estimated life due to wear and tear. Accounting estimates include the estimated salvage value and the estimated useful life of depreciable assets, estimated percentage of bad debts expense, estimated percentage of units to be repaired or replaced during a warranty period, and routine estimates of monthly expenses for utilities and other expenses.  Definition of Accounting Estimates. Financial statements provide investors and analysts with information about a company’s ability to manage its financial transactions and build value in the organization. Accountants gather information to use when creating the financial statements. This information includes both actual dollar amounts and estimated amounts. Accounting estimates require the accountant to determine what financial value to record when the actual amount is unknown. Basis. For the accounting estimates to be useful, the accountant needs a reliable basis for estimating those numbers. She might use historical information, documentation or personal calculations to estimate the numbers. Historical information provides a reliable basis for numbers that rarely change. Accountants gather information to use when creating the financial statements. This information includes both actual dollar amounts and estimated amounts. Accounting estimates require the accountant to determine what financial value to record when the actual amount is unknown. However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related asset, liability, or equity item in the period of the change. [IAS 8.37]. 1 the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods. 2  if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact. [IAS 8.39-40]. 2. Introduction 1. The purpose of this International Standard on Auditing (UK and Ireland) (ISA (UK and Ireland)) is to establish standards and provide guidance on the audit of accounting estimates contained in financial statements. 4. Management 1 is responsible for making accounting estimates included in financial statements. These estimates are often made in conditions of uncertainty regarding the outcome of events that have occurred or are likely to occur and involve the use of judgment. 2012 Technical Summary IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors as issued at 1 January 2012. Includes IFRSs with an effective date after 1 January 2012 but not the IFRSs they will replace. This extract has been prepared by IFRS Foundation staff and has not been approved by the IASB.  Change in Accounting Estimate. When accounting for business transactions, there will be times when an estimate must be used. In some cases, those estimates prove to be incorrect, in which case a change in accounting estimate is warranted. A change in estimate is needed when there is a change that: 1  Affects the carrying amount of an existing asset or liability, or. 2  Alters the subsequent accounting for existing or future assets or liabilities. When there is a change in estimate, account for it in the period of change. If the change affects future periods, then the change will likely have an accounting impact in those periods, as well. Audit Procedures on Accounting Estimates. An accounting estimate is an approximation of a financial statement element, item, or account in the absence of exact measurement. Management is responsible for establishing the process and controls for preparing accounting estimates. Judgment is requires in making an accounting estimate. Accounting estimates may have a significant affect on a company’s financial statements.
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what are accounting estimates