Accounting estimate: definition, techniques, inputs

Learning objectives

• Explain what an accounting estimate is (a monetary amount subject to measurement uncertainty) and its link with the objective of the accounting policy.L1, L2
• Identify the measurement techniques and inputs used to develop an accounting estimate.L2, L3

Normative references

• IAS 8 §5Definitions: accounting policies — the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements; accounting estimates — monetary amounts in financial statements that are subject to measurement uncertainty; 'material' — used as defined in IAS 1 (para. 7); prior period errors — omissions from, and misstatements in, the financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available when those financial statements were authorised for issue and could reasonably be expected to have been obtained and taken into account (mathematical mistakes, mistakes in applying accounting policies, oversights, misinterpretations of facts, fraud); retrospective application — applying a new accounting policy as if that policy had always been applied; retrospective restatement — correcting the recognition, measurement and disclosure of amounts as if the error had never occurred; prospective application — applying a new policy to transactions occurring after the date of the change, and recognising the effect of a change in estimate in the current and future periods affected; impracticable — a requirement the entity cannot apply after making every reasonable effort to do so, which, for a prior period, covers three situations: effects not determinable; assumptions required about what management's intent would have been at the time; significant estimates for which it is impossible to distinguish objectively information that provides evidence of circumstances that existed at that date and that would have been available when the financial statements were authorised for issue.
• IAS 8 §32An accounting policy may require items to be measured at monetary amounts that cannot be observed directly and must be estimated: the entity then develops an accounting estimate to achieve the objective set out by the policy, using judgements or assumptions based on the latest available reliable information. Examples: loss allowance for expected credit losses (IFRS 9), net realisable value of inventory (IAS 2), fair value of an asset or liability (IFRS 13), depreciation expense for an item of property, plant and equipment (IAS 16), provision for warranty obligations (IAS 37).
• IAS 8 §32ATo develop an accounting estimate, the entity uses measurement techniques and inputs; measurement techniques include estimation techniques (for example, for the loss allowance for expected credit losses under IFRS 9) and valuation techniques (for example, for fair value under IFRS 13).
• IAS 8 §32BThe term 'estimate' in IFRSs does not always refer to an accounting estimate as defined in the standard; it may refer, for example, to an input used in developing an accounting estimate.
• IAS 8 §33The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

17 questions

• The use of reasonable estimates is an essential part of preparing financial statements and does not undermine their reliability.L1
• An entity develops an accounting estimate to achieve the objective set by an accounting policy when the amount required cannot be observed directly.L1
• The word 'estimate' used in an IFRS always means an accounting estimate as defined in IAS 8.L2
• The measurement techniques used to develop an accounting estimate include estimation techniques and valuation techniques.L2
• Which of the following is an accounting estimate?L1
• What characteristic defines an accounting estimate?L1
• On what basis does an entity form the judgements and assumptions underlying an accounting estimate?L2
• Bruscois measures an investment at fair value using discounted future cash flows. How should this discounted cash flow model be described?L2
• To measure a provision, Fosore uses a discount rate that a standard calls an 'estimate'. How should this rate be described under IAS 8?L2
• Which of the following items at Gaulbard is not an accounting estimate?L2
• Which of the following amounts does IAS 8 give as examples of accounting estimates?L1
• For the loss allowance on its receivables, Jirvine uses a provision matrix fed by historical default rates and economic forecasts. Which descriptions are correct?L2
• Which statements about accounting estimates are correct?L2
• In Kedian's closing file, several items are called 'estimates'. Which of them are actually inputs rather than accounting estimates?L3
• At the reporting date, Kevois reviews the net realisable value of its inventories. Which steps are consistent with IAS 8?L3
• A director of Myrgence is worried: 'Our accounts contain so many estimates that they cannot be reliable.' Write a short, reasoned reply.L2
• To train Nairvia's new accountants, explain, using the fair value of a building as an example, how the accounting policy, the accounting estimate, the measurement technique and the inputs fit together.L3