Question

A company estimates an allowance for inventory obsolescence. however, this estimate is sensitive to changes in the short term. What are the disclosures required by current GAAP? Where can the answer be found in the FASB codification?

Answer 1

Accounting Changes and Error Corrections — Overall
Change in Accounting Estimate
FASB codification : 250-10-45-17
A change in accounting estimate shall be accounted for in the period of change if the change affects
that period only or in the period of change and future periods if the change affects both. A change in
accounting estimate shall not be accounted for by restating or retrospectively adjusting amounts
reported in financial statements of prior periods or by reporting pro forma amounts for prior periods.

Common examples of changes in accounting estimates include, but are not limited to the following:
1. Change in the estimated useful life or salvage value of a long-lived asset
2. Change in estimated allowance for loan losses or bad debts
3. Change in estimated liability for warranties
4. Change in estimates of obsolete and excess inventory

Accounting Changes and Error Corrections — Overall
Disclosure
Change in Accounting Estimate
Codification : 250-10-50-4

Interalia : 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.

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. A change in accounting estimate
is a necessary consequence of the assessment, in conjunction with the periodic presentation of
financial statements, of the present status and expected future benefits and obligations associated
with assets and liabilities. Changes in accounting estimates result from new information. Examples of
items for which estimates are necessary are uncollectible receivables, inventory obsolescence, service
lives and salvage values of depreciable assets, and warranty obligations

Accordingly in question as companies earlier estimate has now changed with new information and it is also given that estimate is sensitive to change so we should disclosed jn financials.