Accounting for Changes in Estimates and Accounting Policies
- Graziano Stefanelli
- Jun 20
- 2 min read
Changes in accounting estimates and policies directly affect the timing and comparability of financial statement figures. The proper identification and reporting of such changes are governed by strict requirements under US GAAP and IFRS, ensuring transparency, consistency, and the reliability of reported results. Financial statement preparers must distinguish between changes in estimates, which are accounted for prospectively, and changes in accounting policies, which generally require retrospective adjustment.
1. Definitions and Distinctions
a) Change in Accounting Estimate
A change in the measurement of an existing account based on new information, developments, or experience. Examples include:
Revised useful life or residual value of fixed assets
New assessment of uncollectible accounts receivable
Updated inventory obsolescence provisions
Estimates are inherently uncertain and require regular review and adjustment as new data becomes available.
b) Change in Accounting Policy
A change in the specific accounting principle, basis, or method applied to transactions, often due to the adoption of new standards or voluntary improvement of reporting. Examples include:
Switching from FIFO to weighted average inventory method
Adopting a new revenue recognition policy
Moving from cost model to revaluation model for fixed assets (IFRS)
A change in policy is not the result of new information, but a deliberate shift in the accounting approach.
2. Accounting Treatment
a) Changes in Accounting Estimates (Prospective Application)
Accounted for in the current and future periods only—no restatement of prior financial statements.
Effect is recognized in the period of change and future periods, as applicable.
Example:
A company changes the useful life of machinery from 5 years to 8 years based on updated usage data. The carrying amount at the date of change is depreciated over the new remaining useful life.
Journal Entry (Depreciation Adjustment):
Dr. Depreciation Expense
Cr. Accumulated Depreciation
b) Changes in Accounting Policies (Retrospective Application)
Adjust prior period financial statements as if the new policy had always been applied (unless impractical).
Adjust opening balances of affected accounts (typically retained earnings) for earliest presented period.
Example:
Switching inventory method from FIFO to weighted average. All comparative financial statements are restated; opening retained earnings is adjusted for any cumulative impact.
Journal Entry (Retrospective Adjustment):
Dr./Cr. Retained Earnings (for cumulative effect)
Cr./Dr. Inventory
c) Exception—Correction of Errors
Corrections of prior period errors (e.g., mathematical mistakes, misapplication of standards) are also adjusted retrospectively and separately disclosed.
3. Disclosure Requirements
Companies must disclose:
Nature and reasons for the change
For policy changes and error corrections: Amount of adjustment for current and each prior period, and cumulative effect on opening balances
For changes in estimate: Impact on income statement line items for current and future periods, if practical
4. Standards Reference
US GAAP: ASC 250 “Accounting Changes and Error Corrections”
IFRS: IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”
5. Example Table: Change in Depreciation Estimate
6. Common Pitfalls and Best Practices
Misclassifying changes: Carefully distinguish between estimate, policy, and error corrections.
Inadequate disclosure: Provide full explanation and quantitative impact.
Failure to document rationale: Keep evidence supporting changes in estimate or the reason for a new policy.
____________ FOLLOW US FOR MORE.
DATA STUDIOS
