How Do Your Accounting Estimates Measure Up?

Today’s businesses face unprecedented uncertainty — from geopolitical risks and cyberthreats to tax and regulatory reforms. So, management’s historical means of addressing uncertainty in accounting estimates may not pass muster in the coming audit season.

Accounting for uncertainty

Some financial statement items are relatively cut-and-dried. But others can’t be measured precisely and, instead, are based on what management expects to happen in the future.

Examples of accounting estimates include:

  • Allowance for doubtful accounts,
  • Work-in-progress inventory,
  • Warranty obligations,
  • Depreciation method or asset useful life,
  • Recoverability provision against the carrying amount of investments,
  • Fair value of goodwill and other intangibles,
  • Long-term contracts,
  • Uncertain tax positions, and
  • Costs arising out of litigation settlements and judgments.

Accounting estimates may be based on subjective or objective information (or both) and involve a level of measurement uncertainty. Each accounting estimate is subject to its own level of uncertainty — and highly uncertain outcomes can lead to unintentional errors or, worse, intentional misstatement.

Use of specialists

Some estimates are easily determinable and may be made by in-house personnel with a fair degree of accuracy. This is especially true for estimates that can be made based on objective inputs (like published interest rates or percentages observed in previous reporting periods).

Other estimates are inherently subjective or complex — and may be derived from speculative inputs. Examples include share-based payments, goodwill and impairment write-offs. Managers are champions of the company’s products and strategies and, therefore, may have unrealistic expectations. To avoid painting a rosier picture than reality, companies often use outside specialists, such as business appraisers or actuaries, to independently estimate complex items.

Ready for audit season?

Audit season is right around the corner for calendar-year-end businesses. In light of today’s volatile marketplace, expect auditors to give renewed attention to your accounting estimates. For example, they may ask more in-depth questions or perform additional testing procedures. You can facilitate audit fieldwork and minimize audit adjustments by identifying accounts that are based on management’s estimates and reviewing the procedures used to make the estimates. Some items may require a different measurement technique than you’ve used in the past.

If you’re uncertain about how marketplace uncertainty could affect your estimates, contact us to help you get a timely, accurate assessment of financial performance before the start of audit season.

© 2017


Information provided on this web site “Site” by Thompson Greenspon is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Thompson Greenspon has made every reasonable effort to ensure that the information provided is accurate, Thompson Greenspon, and its shareholders, managers and staff, make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. Thompson Greenspon also does not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

Information contained on this Site is protected by copyright and may not be reproduced in any form without the expressed, written consent of Thompson Greenspon. All rights are reserved.

Share: