Accounting change definition
/What is an Accounting Change?
An accounting change is a change in accounting principle , accounting estimate , or the reporting entity. These changes can trigger modifications in the reported profits or other financial aspects of a business. They are covered in more detail below. An accounting change may require discussion in the notes accompanying the financial statements . This is needed so that the users of the statements can ascertain the extent to which an accounting change triggered a variation in the financial statements.
Change in Accounting Principle
A change in accounting principle is a change from one generally accepted accounting principle to another generally accepted accounting principle. A change in principle does not occur when there is an initial adoption of an accounting principle caused by transactions occurring for the first time. This is a relatively rare occurrence. When it occurs, the reporting entity may be required to restate its past financial statements to reflect the change.
Change in Accounting Estimate
A change in accounting estimate is a change that adjusts the carrying amount of an existing asset or liability , or which alters subsequent accounting for either existing or future assets or liabilities. Accounting estimates that are commonly changed include reserves for uncollectible receivables , warranty obligations, and inventory obsolescence. Accounting estimates may occur as frequently as every reporting period . An accounting change does not trigger a restatement of a reporting entity’s prior financial statements.
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Change in Reporting Entity
A change in reporting entity is a change that results in financial statements that are effectively those of a different reporting entity. This usually involves changing from individual to consolidated reporting , or altering the subsidiaries that make up a group of entities whose results are consolidated.
Example of an Accounting Change
An example of an accounting change is switching from the cash basis to the accrual basis of accounting .
