A controller switches from last-in, first-out (LIFO) to first-in, first-out (FIFO), an auditor finds prior-year depreciation understated by $150,000, and a CFO revises the useful life of a delivery fleet from 10 to 7 years. Three changes, three treatments, three different ways to touch retained earnings.
ASC 250 draws a sharp line between three categories that look similar in plain English: switching methods, revising estimates, and fixing mistakes. Each gets a different treatment, and the exam tests whether you can classify the situation before you compute anything.
HIGH-FREQUENCY: Most III.A1 questions hinge on classification, not arithmetic. Once you classify correctly, the journal entry follows directly from the rule.
A change in accounting principle occurs when an entity adopts a different GAAP method. Both old and new methods must be GAAP. Examples: LIFO to FIFO, completed-contract to percentage-of-completion, cost method to equity method.
A change in accounting estimate reflects new information that revises an existing estimate. The original estimate was reasonable when made; the revision is not a correction.
Common mistakes
- Treating a depreciation method change as retrospective. Switching from SL to DDB feels like a principle change. ASC 250 classifies it as an estimate change effected by a principle change: prospective. The trap answer restates prior depreciation; the correct adjustment is zero retroactive.
- Adjusting opening retained earnings for an estimate change. A revised useful life or allowance never adjusts opening RE. Posting $50,000 to retained earnings for a useful-life revision is wrong. The change runs through current-period income only.
- Calling a corrected math error a "change in estimate." If the original number was wrong when issued (math error, missed accrual, misclassification), it is an error correction. Treating it as an estimate change avoids restating prior periods, which is the trap.
Bottom line
- Change in accounting principle is retrospective. Restate prior periods and adjust opening retained earnings of the earliest period presented.
- Change in accounting estimate is prospective. Current and future periods only, no restatement and no opening RE adjustment.
- Error correction requires restatement. Restate prior periods, adjust opening RE, and disclose the nature of the error.
- Change in estimate effected by a change in principle (depreciation method change) is prospective.
Exam shortcut
When a question describes a change, run the decision tree before reaching for a formula: wrong-when-issued (error, restate), new method (principle, retrospective), new information (estimate, prospective), depreciation method (estimate-via-principle, prospective). The trap answer for a LIFO-to-FIFO change is the full pretax inventory difference posted to retained earnings; the correct entry splits between deferred tax and RE.
The full lesson (about 2,331 words, 16 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.A1
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