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.
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.