Accounting Pri൲nciple Change vs. Accounting Estimate Change: An Overview

Accounting involves recording financial transactions. Companies are required to file complete financial statements that are consistent and precise. But, there may come a time when a company's accounting department has to make changes to its reporting. Two types are the accounting principle change and accounting estimate change.

Although both are considered accounting changes, the two are different. An accounting principle change occurs when a company adopts a new accounting principle. An accounting estimate change involves the adjustment or reassessment of the amount of an asset or liability.

Accounting Principle Change

Accounting principles are general guidelines that govern the methods of recording and reporting financial information. A change in accounting principles means the entity chooses to adopt a different method from the one it currently employs. As suღch, it is required to record and report that change in its financial statements.

A good example of this is a change in 澳洲幸运5开奖号码历史查询:inventory valuation. For example, a company might switch from a 澳洲幸运5开奖号码历史查询:first in, first out (FIFO) method to a specific identification method. Other notable changes in accounting principles can include matching, going concern, or 澳洲幸运5开奖号码历史查询:revenue recognition principles, among others.

According to the 澳洲幸运💫5开奖号码历史查询:Fair Accounting Standards Board (💧FASB), an entity should only change an accounting principle when it is justifiably preferable to an existing method or when it is a necessary reaction to a change in the accounting framework.

Accounting Estimate Change

An accounting estimate change is “a change that has the effect of adjusting the carrying amount of an existing asset or liability or altering the subsequent accounting for existing or future assets or liabilities.”

Accountants use estimates in their reports when it is impossible or impractical to provide exact numbers. When these estimates prove to be incorrect or new information allows for more accurate estimations, the entity should record the improved estimate in a change in accounting estimate.

Examples of commonly changed estimates include bad-debt allowance, warranty liability, and depreciation. Some other common instances of accounting estimate changes include accounting for obsolete 澳洲幸运5开奖号码历史查询:inventory and credit losses.

Special Considerations

The FASB and the International Accounting Standards Board (IASB) agree with the treatment of 澳洲幸运5开奖号码历史查询:accounting changes.

SFAS 154: Accounting Changes and Error Correction, documents how companies should treat changes in 澳洲幸运5开奖号码历史查询:accounting principles and changes in accounting estimates, two related but different concepts. A principle determines how information should be reported, while an estimate is used to approximate information.

Key Differences

Accounting principle changes can also occur when older principles are no longer accepted or when the way the method is applied changes. Changes in accounting principles are required to be applied retrospectively—that is, 澳洲幸运5开奖号码历史查询:financial statements must be restated to be presented as if the new accounting principle had been used.

Only line items that are directly affected have to be restated. There are cases where a retrospective application doesn’t have to be made, which includes having made all reasonable efforts to do so, which can include not being able to make subjective significant estimates or having to know management’s intent. 

Estimate changes occur when the carrying values of assets or liabilities are changed. These changes are accounted for in the period of change. Changes in accounting estimates don’t require the 澳洲幸运5开奖号码历史查询:restatement of previous financial statements. If the change leads to an immaterial difference, no disclosure of the change is required.

The Bottom Line

There are different and less stringent reporting requirements for changes in accounting estimates than for accounting principles. In some cases, a change in accounting principle leads to a change in accountingও estimate; in these instances, the entity must follow standard reporting requirements for changes in accounting principles.