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Changes in accounting estimates

Changes in accounting estimate are not applied retrospectively.
Estimates arise in relation to business activities because of the uncertainties inherent within them. Judgements are made based on the most up to date information and the use of such estimates is a necessary part of the preparation of financial statements, requiring the judgement of management in their application. It does not undermine their reliability. Examples include:

1. 
   A necessary irrecoverable debt allowance
   
2. 
   Useful lives of depreciable assets
   
3. 
   Provision for obsolescence of inventory (IAS 8: para. 32)
   

The rule here is that the effect of a change in an accounting estimate should be included in the determination of net profit or loss in one of:

1. 
   The period of the change, if the change affects that period only
   
2. 
   The period of the change and future periods, if the change affects both (IAS 8: para. 36)
   

Changes may occur in the circumstances which were in force at the time the estimate was calculated, or perhaps additional information or subsequent developments have come to light.
An example of a change in accounting estimate which affects only the current period is the irrecoverable debt allowance. However, a revision in the life over which an asset is depreciated would affect both the current and future periods, in the amount of the depreciation expense.
Reasonably enough, the effect of a change in an accounting estimate should be included in the same expense classification as was used previously for the estimate. This rule helps to ensure consistency between the financial statements of different periods.
The materiality of the change is also relevant. The nature and amount of a change in an accounting estimate that has a material effect in the current period (or which is expected to have a material effect in subsequent periods) should be disclosed. If it is not possible to quantify the amount, this impracticability should be disclosed. (IAS 8: para. 40)

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