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.
Related AccountingTools Course
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.
Examples of Accounting Changes
Here are several examples of accounting changes:
Change in Accounting Principle
-
Switching from first-in, first-out (FIFO) to last-in, first-out (LIFO) inventory valuation method.
-
Adopting the percentage-of-completion method instead of the completed-contract method for revenue recognition in long-term construction contracts.
-
Moving from a straight-line depreciation method to an accelerated depreciation method (or vice versa).
Change in Accounting Estimate
-
Revising the useful life or salvage value of a depreciable asset.
-
Adjusting the allowance for doubtful accounts due to new information about customer payment behaviors.
-
Updating the warranty expense estimate based on new historical trends or product performance.
Change in Reporting Entity
-
Consolidating a newly acquired subsidiary into the financial statements after a merger or acquisition.
-
Changing from presenting financials for a single entity to a consolidated group of entities.
-
Adjusting financial statements to reflect a new parent company in a reorganization.
Accounting Change FAQs
How does a change in accounting principle differ from a change in estimate?
A change in accounting principle adopts a different generally accepted method, such as switching inventory costing methods, and is usually applied retrospectively. A change in estimate revises an approximation based on new information, such as useful life or bad debt rates, and is applied prospectively through current and future periods.
