Non-routine accounting estimate: concept

A non-routine accounting estimate is an accounting estimate that is not made on a routine basis or as part of a routine practice or policy. In which case, the accounting estimate arises from the recording of non-routine and non-recurring transactions and events, and hence the management does not make such estimates on a frequent basis. This involves the estimation of certain items in the financial statements whose value cannot be determined using objective data.

Accounting estimates are usually of a non-routine nature and may be established only at a period end, as with regards to items such as deferred tax. At times, such estimates may be take the form of a routine procedure carried out  by the accounting system as in the case of calculating formulaic items (e.g., slow-moving stock provision or fixed asset depreciation).

Estimates are often made where there is some level of uncertainty as to the outcome of future events and involve the use of judgement. As a result, there is a higher risk of material misstatement when accounting estimates are involved. Audit evidence may be less conclusive and auditor judgement is likely to be needed, frequently making such areas more difficult to audit.

An accounting estimate, in principle, is a monetary amount for which the measurement of value is subject to estimation uncertainty, all in line with the requirements of an applicable financial reporting framework. It is also defined as a technique to measure such items on financial statements that have no accurate quantification and are therefore figured out based on judgment and knowledge derived from experience and past performance.

Estimates about transactions and events are also necessary for maintaining proper details in the books of accounts for future reference and use. Therefore, even though uncertainties and values must be estimated using historical data and approximations, all such estimates should also be a part of financial reporting. A well-established estimation provides for transparent and reliable financial statements, and vice versa.

Accounting estimates vary greatly in nature and are required to be made by an entity’s management when the monetary amounts cannot be directly observed from available data or conditions. The process of making accounting estimates involves selecting and applying a specific method that would be based on a set of assumptions and data, requiring the application of management’s judgment.

Applying management’s judgment adds to complexity and subjectivity of the process of estimation, and the effects of such factors and other inherent risk factors on the measurement of monetary amounts would increase their susceptibility to misstatement.

Non-routine accounting estimates: examples

The main examples of non-routine accounting estimates may include:

• estimates for physical inventory taking.
• estimates for adjustments for foreign currency differences.
• estimates for calculation of certain non-cash items (depreciation expenses).
• estimates for legal costs (payments to settle lawsuits), finance costs (interest payments on debt to creditors/ lenders), restructuring costs, inventory write-offs, and any one-time deductions (in miscellaneous income deductions) in the income statement.