Judgement

In accounting, judgements (management judgement) represent conclusions are made by an entity’s management in applying accounting policies. A judgement reflects the ability of a management to reach sensible conclusions as to certain aspects of financial reporting. The preparation of financial statements requires management to make judgements about the application of accounting policies that have a significant effect on the items and amounts recognized in the financial statements. The key areas in accounting that require judgement include timing, recognition and value. For example,  judgement related to timing requires management to determine when a transaction takes place, at what date and in which financial period. This entails that management has to determine whether a transaction shall be recognized in this financial year or the next financial year.

This include judgements that are significant (significant judgement). A judgement is considered significant, if a different judgement is supposed to be used, and the impact on the financial statements is found to be significant.

Accounting estimate

An accounting estimate (estimate) 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. Inherent uncertainty arise from differences in valuation, measurement or the method applied in the recognition process of financial statement items such as assets, liabilities, revenue and expenses.

The value of such items cannot be always determined or reached at based on any particular data or observations. The process of estimation usually involves a lot of uncertainties and hence a certain degree of expertise, skill and experience is required to determine the value of such elements, which, after all, will always be an approximation. Estimates are provided to disclose sufficient information to enable users of financial statements to understand material sources of estimation uncertainty such as sensitivity analysis and range of possible outcomes.

Estimation involves attempts to quantify the specific amounts at risk of material adjustment e.g., specific provision against general provision, and so on. This is often based on a set of assumptions underlying estimates, which, per se, have to be quantified when users need this information to fully understand their effect.

Differences narrowed down

In short, for preparation of financial statements, entities have to make many judgements and estimates, which will be expected to have a substantial effect on its reported performance and financial position. Entities apply judgement in their attempts to identify relevant disclosures and material financial information. Estimates are used when metrics cannot be measured directly and measurement uncertainty arises. For uncertain outcomes related to possible future events involve the use of material information, the process of estimation will involve making certain assumptions.

Overall, entities have to ensure that the essential accounting policies, judgments and estimates applied by management present a fair and accurate picture of their financial position and performance.

Each judgement or estimate can have a great impact on a entity’s financial statements. By nature, each estimate has a range of possible and supportable results. Auditors are usually entrusted with challenging management’s judgments of key assumptions underlying significant accounting estimates, and understanding management’s logic for making accounting judgments and estimates holds a center stage of an entity’s audit committee’s discussions with its management and the external auditors.