Accounting estimates – what, when and how?

A new audit standard covering accounting estimates recently came into force and introduced some changes to how estimates were audited. This article is a recap of what has changed and what to expect from an audit in 2023.

What are accounting estimates?

An accounting estimate is exactly what you’d expect – it is an amount for which the measurement is subject to estimation uncertainty. Examples of accounting estimates are listed below: –

  • Depreciation & amortisation
  • Accruals
  • Provisions – litigation, warranties, bad debts, stock
  • Revenue recognition – long term contracts
  • Asset impairments
  • Property valuations
  • Pension assets & liabilities

Some estimates are reasonably straightforward, such as depreciation or accruals. Some are a bit more complex, such as asset impairments or pensions.

When will this affect my business?

Well, this new audit standard is relevant to accounting periods commencing on or after 15th December 2019, so these changes are actually already with us. You may have seen some changes in this area during your last audit and these changes will continue to apply in future.

Remind me – what changed?

Author Jonathan Delaney

The new audit standard requires more work to be performed by both directors and auditors. It also typically requires more detailed disclosures to be included in the financial statements.

Directors are still required to calculate their accounting estimates in the usual way, for example, calculating depreciation charges as part of month end procedures. However, auditors will now be asking for more detailed information from directors about these calculations during the audit.

This will include asking for details of exactly how the estimates are calculated, what the supporting data is based on and also details of any underlying assumptions that feed into the calculations themselves. The directors will be responsible for providing this information to their auditor.

For example, a retail clothing business may calculate a provision for stock returns (especially around Christmas!) as part of their year end management accounts work. During the year end audit, the auditor may ask not only about how the calculation has been prepared, but also about what sort of assumptions, such as levels of historic returns, are relevant to the calculation. The auditor will then review these assumptions as well as the calculations themselves.

If you’d like to know more about accounting estimates before your next audit, or if you’d like to find out more about our audit services generally, then please do get in touch.

Photo by Kelly Sikkema on Unsplash

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