How is a change in an accounting estimate reported?

A change in an accounting estimate is reported prospectively. This means that the effects of the change are applied to the current period and going forward, rather than adjusting prior periods. When an accounting estimate is revised, like estimating useful lives of assets or uncollectible receivables, the new estimate is utilized in the current and future financial statements.

This approach avoids revising past financial results, which could lead to confusion about the company’s historical performance. For example, if a company changes its estimate of the useful life of a machine from 10 years to 8 years, the depreciation expense will be adjusted in the current and subsequent periods, reflecting the new estimate without changing the previously reported financial statements.

This treatment aligns with the principle of relevance and reliability, ensuring that financial information is current without misleading users by altering historical data.