Nature of Accounting Estimates (Ref: ParNature of Accounting Estimates (Ref: Para. 2)

Nature of Accounting Estimates (Ref: Para. 2)

Examples of Accounting Estimates

1. Examples of accounting estimates related to classes of transactions, account balances and disclosures include:

• Inventory obsolescence.
• Depreciation of property and equipment.
• Valuation of infrastructure assets.
• Valuation of financial instruments.
• Outcome of pending litigation.
• Provision for expected credit losses.
• Valuation of insurance contract liabilities.
• Warranty obligations.
• Employee retirement benefits liabilities.
• Share‑based payments.
• Fair value of assets or liabilities acquired in a business combination, including the determination of goodwill and intangible assets.
• Impairment of long‑lived assets or property or equipment held for disposal.
• Non‑monetary exchanges of assets or liabilities between independent parties.
• Revenue recognised for long‑term contracts.

Methods

1. A method is a measurement technique used by management to make an accounting estimate in accordance with the required measurement basis. For example, one recognised method used to make accounting estimates relating to share‑based payment transactions is to determine a theoretical option call price using the Black‑Scholes option pricing formula. A method is applied using a computational tool or process, sometimes referred to as a model, and involves applying assumptions and data and taking into account a set of relationships between them.

Assumptions and Data

1. Assumptions involve judgements based on available information about matters such as the choice of an interest rate, a discount rate, or judgements about future conditions or events. An assumption may be selected by management from a range of appropriate alternatives. Assumptions that may be made or identified by a management’s expert become management’s assumptions when used by management in making an accounting estimate.
2. For purposes of this Auditing Standard, data is information that can be obtained through direct observation or from a party external to the entity. Information obtained by applying analytical or interpretive techniques to data is referred to as derived data when such techniques have a well‑established theoretical basis and therefore less need for management judgement. Otherwise, such information is an assumption.
3. Examples of data include:

• Prices agreed in market transactions;
• Operating times or quantities of output from a production machine;