Change in accounting estimate

Change in accounting estimate
See also
Accounting estimate Fair value hedge Development cost Long-Term Assets Going concern principle Contribution analysis Asset sales Opening stock Appreciated asset

There will be a situation during accounting for business transactions when an estimate has to be used. In some cases, those estimates turn out to be incorrect so the change in accounting estimates will be warranted. A change in estimate is necessary when:

• influences the carrying amount of liability or an existing asset, or
• alters the subsequent accounting for future or existing assets or liabilities.

The Changes in the accounting estimate determines an expected and normal part of the ongoing process which is looking through future benefits and the current status. Moreover, changes in the accounting estimate contain also obligations connected with liabilities and assets. A change in estimate appears with the outlook of new information which modifies the existing situation. Inversely, there might be no modification in estimate in the lack of new information.

The Examples of Changes in Accounting Estimate

All undermentioned situations in the change in accounting estimate presumably can appear:

• allowance for uncertain accounts,
• changes in the useful life of depreciable capitals,
• reserve for obsolete inventory,
• modifications in the salvage values of depreciable assets,
• modifications in the number of expected warranty obligations.

If a change in accounting estimate is established through a change in principle (for example, a change in depreciation method), it is considered as a change in estimate. An entity effects a change in estimate in cases changing an accounting principle, the footnote exposures needed by a change in accounting principle apply and need to be included in the notes to the budgetary statements.

Accounting estimates

Certain accounting works are based on management's judgment towards the use of estimates. Accounting estimates concern almost every position in the financial statements. Certain of the more common estimates concern those following one of:

• uncollectible accounts receivable,
• warranty usage,
• useful lives of assets,
• completion of projects,
• the in-process inventories.

Consequently, as management purchases additional information and have more experience with regarding such matters as: the agricultural life of plant and equipment property and probable uncollectible receivables, a modification in an accounting estimate might occur. Changes in accounting estimates commonly are reflected prospectively.

Change in accounting estimate affected through a change in accounting principle

A change in accounting estimate which is indissoluble from the effect of a connected change in accounting principle. For an example is a change in estimate effected through a change in principle is a modification in the method of amortization, depreciation or exhaustion for long-lived, nonfinancial assets.

References

• Braiotta L., Gazzaway J.R., Colson R., Ramamoorti S., (2010)., The Audit Committee Handbook, John Wiley and Sons
• Delaney P.R., Whittington O.R., (2011)., Wiley Cpa Examination Review, Outlines and Study Guides, John Wiley and Sons
• Flood J.M. (2014)., Wiley Gaap: Interpretation and Application of Generally Accepted Accounting Principles, John Wiley and Sons
• Jeffrey C. (2008)., Research on Professional Responsibility and Ethics in Accounting, Emerald Group Publishing

Author: Jakub Postawa