The Process for Developing Accounting Es

The Process for Developing Accounting Estimates

Management is responsible for establishing and controlling a process for developing accounting estimates. The process may not be documented or formally applied, however it ordinarily consists of:

(a) identifying situations for which accounting estimates are required;

(b) identifying the relevant factors that may affect the accounting estimates;

(c) gathering sufficient, relevant and reliable data on which to base the accounting estimates;

(d) developing assumptions that represent management's judgement of the most likely circumstances and events regarding the relevant factors; and

(e) determining the estimated amounts based on the assumptions and other relevant factors.

Elements of the control environment that may reduce the likelihood of material misstatements in accounting estimates include:

(a) accumulation of sufficient, relevant and reliable data on which to base the accounting estimates;

(b) preparation of the accounting estimates by qualified personnel;

(c) adequate review and approval of the accounting estimates by appropriate levels of authority, including:

(i) review of sources of relevant factors;

(ii) review of development of assumptions;

(iii) review of reasonableness of assumptions and resulting accounting estimates; and

(iv) consideration of the need to use the work of experts;

(d) comparison of prior period accounting estimates with subsequent results to assess the reliability of the process used to develop accounting estimates; and

(e) consideration by management of whether the resulting accounting estimates are consistent with the plans of the entity.