Three kinds of accounting changes
| Type | Example | Treatment |
|---|---|---|
| Change in accounting principle | FIFO to weighted average | Retrospective — restate prior periods as if the new method always applied |
| Change in accounting estimate | Revised useful life of equipment | Prospective — apply in current and future periods only |
| Change in reporting entity | Consolidating a different set of subsidiaries | Retrospective — restate all prior periods presented |
IMPORTANT: A change in depreciation method (e.g., straight-line to double-declining) is treated as a change in estimate (prospective), not a change in principle — because it reflects a change in the pattern of expected benefit consumption. This is a classic exam trap.
Error corrections
Correcting a prior-period error (e.g., a math mistake, or misapplication of GAAP that existed at the time) is not an accounting change — it's handled by restating prior-period financial statements, similar to retrospective treatment, with a prior-period adjustment to the opening balance of retained earnings.
EXAM TIP: If it's impracticable to determine the cumulative effect of a change for all prior periods, apply the new principle prospectively from the earliest date practicable.