It is when a company wishes to change from the sum-of-years-digits depreciation method to the straight-line method for its fixed assets. It is an accounting change in the method which should be accounted for as estimate change (Afiff& Anantadjaya 2013). The changes should not be treated as a cumulative effect of the income statement. It also does not create a deferred income tax liability effects. The reporting should be treated as a prospective basis in the current year and the future years.
The availability of new information on how to treat financial reporting estimates is influenced by new information. Depreciation requires a change in estimate with prospective effect because the preparation of the financial statement will require estimation. The acceptability of the use of change in the estimate is so because facts and circumstances change most of the time. Business operation are not static they change over time hence need to stay abreast with current reporting changes in the industry.
The need to use changes in accounting estimate and prospective approach is advised by new information in the industry. Business requires achieving a better operation approach by the use of best reporting standards. It is also good for business to report material information relating to their true financial position (Agustini & Viverita 2011). To achieve the new standards and report material financial position business need to adjust or conform to the relevant accounting estimation process.
On the off chance that an open organization got extra data about the administration lives of some of its altered resources that demonstrated that the administration lives beforehand utilized ought to be abbreviated. The firm needs to change into a new accounting principle. The process is based on the swap from one acceptable accounting principle to another acceptable accounting principle. The changes of accounting principle borders on the retrospect approach and prospective approach.
The firm can change from LIFO cash flow assumption to FIFO cash flows method. The new financial methods are recast so that all prior periods are reported in comparative financial statements. The use of the retrospective approach allows for consistency and comparability. All the changes in the financial statements are retrospective in approach as mentioned above. While on the other hand prospective approach is used when it is not practical to use the retrospective approach.
The changes will record in prospective approach in the current financial years. The approach is so because it is not practical to use the retrospective assumption in one financial year. The financial footnotes must contain the change in principle and also the approach adopted by the reporting body. The information is important for comparison purposes. It is also important to note them for decision purposes (Akyu2009).
Changing specific subsidiaries comprising the group of companies for which consolidated financial statements are presented is an example of a change in the entity. The accounting change involved is based on the change in the entity. The change may involve the preparation of consolidated statement of group accounts (Bart2002). The effect on the income statement is that it is retrospective effects. The purpose is to create uniformity in the reporting process.
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