Accounting Changes, Estimate Revisions, and Error Corrections

Accounting changes and error corrections are tested in FAR because the same new fact can lead to very different reporting treatment. A change in accounting principle usually points toward retrospective application. A change in estimate is handled prospectively. A material error correction generally requires prior-period restatement. The exam task is to classify the event first, then apply the correct financial statement treatment.

The safest approach is to ask whether the prior statements were wrong. If they were wrong based on information that was available at the time, the issue is an error correction. If the prior statements were reasonable but a new method is now preferable, the issue may be a principle change. If new information changes a judgment about useful life, collectibility, warranty cost, or similar uncertainty, the issue is usually an estimate revision.

In This Chapter

Classification Map

    flowchart TB
	    A["New fact or reporting change appears"] --> B{"Were prior statements wrong based on information then available?"}
	    B -->|"Yes"| C["Error correction"]
	    C --> D["Restate prior periods if material"]
	    B -->|"No"| E{"Is the entity changing from one acceptable principle to another?"}
	    E -->|"Yes"| F["Change in accounting principle"]
	    F --> G["Apply retrospectively unless impracticable or specific guidance says otherwise"]
	    E -->|"No"| H{"Is the change driven by new information about an estimate?"}
	    H -->|"Yes"| I["Change in accounting estimate"]
	    I --> J["Apply prospectively"]
	    H -->|"No"| K["Analyze reporting-entity or standard-specific guidance"]

Reporting Treatment Checkpoints

How to Use This Chapter

• Classify the event before deciding the adjustment method.
• Separate “new information” from “old information that was missed or misapplied.”
• Treat estimate revisions prospectively unless the facts show a prior-period error.
• Remember that a change in depreciation method is often treated as a change in estimate effected by a change in principle.
• Return here when a FAR miss involves retained earnings, comparative statement restatement, preferability, impracticability, or prior-period correction.

In this section

• ASC 250 Accounting Principle Changes and Estimate Revisions
  FAR guidance for distinguishing accounting principle changes from estimate revisions and selecting the correct application method.
• ASC 250 Retrospective and Prospective Application Methods
  FAR guidance for applying accounting changes retrospectively or prospectively, including impracticability and retained earnings effects.
• ASC 250 Error Corrections and Prior-Period Adjustments
  FAR guidance for identifying material prior-period errors, restating comparative statements, and adjusting retained earnings.