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30.5 Change in accounting estimate
Publication date: 28 Feb 2022
us Financial statement presentation guide
A change in accounting estimate results from new information or modifications to the estimating techniques affecting the carrying amount of assets or liabilities.
ASC 250-10-45-17 indicates that changes in accounting estimates should not be accounted for by restating or retrospectively adjusting the amounts reported in prior period financial statements or by reporting pro forma amounts. Instead, a change in accounting estimate should be accounted for in the period of change and prospective periods, if applicable.
It is important for reporting entities to maintain sufficient documentation to support changes to estimates and the timing of such changes. A change to an accounting estimate should be based on events, facts, or circumstances that occurred during the period in which the estimate was changed.
ASC 250 requires specific financial statement disclosures with respect to changes in accounting estimates.
The effect on income from continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), and any related per-share amounts of the current period shall be disclosed for a change in estimate that affects several future periods, such as a change in service lives of depreciable assets. Disclosure of those effects is not necessary for estimates made each period in the ordinary course of accounting for items such as uncollectible accounts or inventory obsolescence; however, disclosure is required if the effect of a change in the estimate is material. When an entity effects a change in estimate by changing an accounting principle, the disclosures required by paragraphs 250-10-50-1 through 50-3 also are required. If a change in estimate does not have a material effect in the period of change but is reasonably certain to have a material effect in later periods, a description of that change in estimate shall be disclosed whenever the financial statements of the period of change are presented.
At times, a change in estimate can result from a change in accounting principle. A common example is a change in the method of depreciation applied to fixed assets, which is effectively a change in the estimate of the future benefit or pattern of consumption. In such cases, the effect of the change in accounting principle, or the method of applying it, may be inseparable from the effect of the change in accounting estimate. Such a change should be accounted for as a change in estimate. However, the disclosures for both a change in accounting principle and a change in accounting estimate would be required. As with changes in accounting principles, this type of change may only be made if it is preferable. As discussed in SEC FRM 4230.2 (c)(4), a preferability letter is not required for a change in estimate effected by a change in accounting principle. Other changes in estimates do not require an assessment of preferability.
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