An accounting change is a change in accounting principle, accounting estimate, or the reporting entity. These changes can trigger modifications in the reported profits or other financial aspects of a business. In more detail:
- A change in accounting principle is a change from one generally accepted accounting principle to another generally accepted accounting principle. A change in principle does not occur when there is an initial adoption of an accounting principle caused by transactions occurring for the first time. This is a relatively rare occurrence.
- A change in accounting estimate is a change that adjusts the carrying amount of an existing asset or liability, or which alters subsequent accounting for either existing or future assets or liabilities. Accounting estimates that are commonly changed include reserves for uncollectible receivables, warranty obligations, and inventory obsolescence. Accounting estimates may occur as frequently as every reporting period.
- A change in reporting entity is a change that results in financial statements that are effectively those of a different reporting entity. This usually involves changing from individual to consolidated reporting, or altering the subsidiaries that make up a group of entities whose results are consolidated.
An accounting change may require discussion in the notes accompanying the financial statements. This is needed so that the users of the statements can ascertain the extent to which an accounting change triggered a variation in the financial statements.
An example of an accounting change is switching from the cash basis to the accrual basis of accounting.