Estimate or Accounting estimates is a factor that helps in understanding the amount that has been credited or debited. There is no specific measurement available for the same and this is why it becomes difficult to have a track of it. It totally depends on the knowledge and training that one has from their training.
Examples of Accounting Estimates
Basis and Maintenance
- Maintaining documents is important. Furthermore, if there is auditing, the organization can show the reason behind the changes.
- The accountant needs to know about the future benefits and involvement of the assets.
- According to IAS 8: Any change that happens in the accounting estimates process needs an eye. It must be looked through and certain necessities like profit and loss must be kept in mind.
- Record the period of change if the change affects the period only, OR
- The period of the change and future periods of the change affects both.
The change happening in accounting estimates are responsible and change the current period in which the change is actually made and future periods.
Previous periods are only affected if correction and errors and required to sort out, and the correction of these previous errors affect the present and future accounting estimates.
Any sort of change happening in an accounting estimate ultimately ends up to risen up changes in the liabilities, or to any sort of asset or equity.
Management is the one who is responsible to look for accounting estimates, although there are very fewer chances for the process to be documented.
It consists of:
- Identifying accounting estimates requirements.
- Identifying factors that may affect the accounting estimate.
- Determining the estimated amount based on the assumptions.
In making those judgments and those accounting estimates, management must refer to the following applicability:
- The requirements and guidance in international accounting standard board (IASB) standards and interpretations that are dealing with similar related issues.
- And this includes all sorts of definitions, along with recognition criteria, measurements concept included for assets, liabilities, along with the income and expenses of the framework (IAS 8.11)
One should keep in mind these applicabilities while doing the accounting estimate for the organization. Making an estimate includes:
- Proper selection of estimation and valuation techniques.
- Choosing the assumptions properly that are going to be used in the techniques.
Why do we need Accounting Estimates?
A change in accounting estimate is needed when say that there is an effect of the carrying amount of already existing assets and liabilities, and a change is required so that the future and transactions or working can be easy to do.
So that the work can be more fluent and easy. While Auditing the auditor also checks all the accounting estimates.
- Accounting estimate improves the accuracy of the financial statements.
- Investors make their decisions based on this accounting estimate only. So they should be accurate so that it can convince an investor to invest in the company
- Accounts have no such restrictions to make the best accounting estimates whatever estimates they make they just need to keep a record of it.
Internal control is a very important aspect of the organization as the company’s internal control can reduce these cost and inappropriate statements of the accounting estimates.
For good internal control over accounting estimates a company needs:
- Good management’s communication for accounting estimates
- First of all, a qualified person should be responsible to prepare the accounting estimates.
- Comparison between before accounting estimate and after accounting estimate needs to be on display clearly. It helps the company to know about the changes that those accounting estimates are bringing in.
- The estimates and assumptions that are responsible to carry a significant option and risk to introduce any sort of adjustments in order to carry the asset and liabilities are:
- Provision for costs of decommissioning of assets
The Group creates a provision for costs of decommissioning of assets. In the financial year, the Group verifies the number of costs anticipated in connection with decommissioning of assets, the anticipated date of completing tearing down works and the discount rate applied. As a result of the verification, the assumption adopted did not change.
- Deferred tax asset and its recoverability:
In the financial year, the group adjusted the amount of tax asset recorded in connection with the tax obtained.
- Expenditure on development:
Development works comprise costs incurred in connection with project activities, developing new products for customers and costs of works on reducing the costs of obtaining the main raw materials for production from alternative sources, and are related to the rubber segment.