Yakub02
Banned
Accounting estimates
An accounting estimate is made for an item in the financial statements when the item cannot be measured with precision, and there is some uncertainty about it.
An estimate is therefore based, to some extent, on management’s judgement. Management estimates might be required, for example, for the following items: bad debts; inventory obsolescence; the fair value of financial assets or liabilities;
the useful lives of non-current assets;
the most appropriate depreciation pattern (depreciation method, for example straight line or reducing balance) for a category of non-current assets; and measurement of warranty provisions.
The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.
Accounting policy vs accounting estimate It is important to distinguish between an accounting policy and an accounting estimate. Sometimes it can be difficult to distinguish between changes in accounting policy from changes in accounting estimate. In such cases any change is treated as a change in accounting estimate.
Accounting policy: Depreciating plant and equipment over its useful life Accounting estimate: How to apply the policy - for example, whether to use the straight line method of depreciation or the reducing balance method is a choice of accounting estimate.
An accounting estimate is made for an item in the financial statements when the item cannot be measured with precision, and there is some uncertainty about it.
An estimate is therefore based, to some extent, on management’s judgement. Management estimates might be required, for example, for the following items: bad debts; inventory obsolescence; the fair value of financial assets or liabilities;
the useful lives of non-current assets;
the most appropriate depreciation pattern (depreciation method, for example straight line or reducing balance) for a category of non-current assets; and measurement of warranty provisions.
The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.
Accounting policy vs accounting estimate It is important to distinguish between an accounting policy and an accounting estimate. Sometimes it can be difficult to distinguish between changes in accounting policy from changes in accounting estimate. In such cases any change is treated as a change in accounting estimate.
Accounting policy: Depreciating plant and equipment over its useful life Accounting estimate: How to apply the policy - for example, whether to use the straight line method of depreciation or the reducing balance method is a choice of accounting estimate.
