An accounting estimate that is 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 routine and recurring transactions and events, and hence the management makes such estimates on a frequent basis. This involves the estimation of certain items in the financial statements whose value can be determined using objective data.

An example of routine accounting estimates is fair valuation of certain in-kind assets or contributions. Another example is an estimate made for warranty expenses. Such estimates routinely impact the value of assets, liabilities, and also the amounts  of certain recurring items. However, for revenue and expenses, not all routine estimates would be part of core revenue generation process. Furthermore, it is possible that at times management uses routine estimates, inter alia, for earnings management.

Even in the case of routine estimates, deviation from the mean values may occur, but this should be within acceptable ranges (e.g., earnings reported in a way that would meet analysts’ forecasts).

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, routine or nonroutine, 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.

The estimation used for measurement of such monetary amounts is subject to the so-called estimation uncertainty, corresponding to inherent limitations in management’s judgment or data. These limitations lead to inherent subjectivity and variation in the measurement outcomes.

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.