Question

What happens when a change takes place in an accounting policy and estimate for a corporation? Discuss briefly also any retrospective or prospective impacts of those changes on corporate financials if any.

* Please write about in paragraph format if possible

Answer 1

Solution:-

Accounting Principle Change

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

A good example of this is a change in inventory valuation; for example, a company might switch from a first in, first out (FIFO) method to a specific-identification method. According to the 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.

Other notable changes in accounting principles can include matching, going concern, or revenue recognition principles, among others.

Accounting Estimate Change

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.

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