Critical estimates and judgements

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Critical estimates and judgements – The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the group’s accounting policies. [IAS 1.122, IAS 1.125]

The note for critical estimates and judgements provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be wrong. Detailed information about each of these estimates and judgements is included in other notes together with information about the basis of calculation for each affected line item in the financial statements.

The areas involving significant estimates or judgements are:

  • estimation of current tax payable and current tax expense in relation to an uncertain tax position
  • estimated fair value of certain financial assets
  • estimation of fair values of land and buildings and investment property
  • estimation uncertainties and judgements made in relation to lease accounting
  • estimated goodwill impairment
  • estimated useful life of intangible asset
  • estimation of defined benefit pension obligation
  • estimation of provision for warranty claims
  • estimation of fair values of contingent liabilities and contingent purchase consideration in a business combination
  • recognition of revenue and allocation of transaction price
  • recognition of deferred tax asset for carried-forward tax losses
  • impairment of financial assets, and
  • consolidation decisions and classification of joint arrangements.

Estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances.

Guidance – Critical estimates and judgements

Sources of estimation uncertainty

The recognition of a net defined benefit asset may also warrant additional disclosures. For example, the entity should explain any restrictions on the current realisability of the surplus and the basis used to determine the amount of the economic benefits available. [IFRIC 14.10]

Significant judgements

Examples of significant judgements that may require disclosures are judgements made in determining:

  1. when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other entities
  2. whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue
  3. whether the contractual terms of a financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding
  4. whether an asset should be classified as held-for-sale or an operation meets the definition of a discontinued operation
  5. whether multiple assets should be grouped to form a single cash-generating unit (where this would affect whether an impairment is recognised)
  6. whether there are material uncertainties about the entity’s ability to continue as a going concern. [IAS 1.123]

Another example of judgements that may need to be explained are judgements made by the entity about the possible impact of climate-related and other emerging business risks. This will be the case in particular if investors could reasonably expect that climate-related risks (or other emerging business risks) could affect the amounts and disclosures in the financial statements. In these circumstances, entities may need to explain, for example, why they have concluded that they do not need to factor climate-related risks into their impairment testing assumptions.

Change of accounting estimate in final interim period

If an estimate of an amount reported in an interim period is changed significantly during the final interim period of the annual reporting period but separate financial statements are not published for that final interim period, the nature and amount of that change in estimate shall be disclosed in a note to the annual financial statements for that annual reporting period. [IAS 34.26]

Example – Revision of useful lives of plant and equipment

During the year the estimated total useful lives of certain items of plant and equipment used in the manufacture of furniture at a subsidiary were revised. The net effect of the changes in the current financial year was an increase in depreciation expense of CU980,000. [IAS 8.39, IAS 16.76]

Assuming the assets are held until the end of their estimated useful lives, depreciation in future years in relation to these assets will be increased/(decreased) by the following amounts:

Year ending 31 December


2021 Critical estimates and judgements Critical estimates and judgements Critical estimates and judgements


2022 Critical estimates and judgements Critical estimates and judgements Critical estimates and judgements


2023 Critical estimates and judgements Critical estimates and judgements Critical estimates and judgements


2024 Critical estimates and judgements Critical estimates and judgements Critical estimates and judgements



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Critical estimates and judgements

IFRS Synonyms:
Critical estimates, Critical judgements, Significant estimates and judgements, Significant estimates, Significant judgements