ASC 250 Change in Principle, Estimate, or Error

Was the item caused by a mathematical mistake, a misapplication of GAAP, or an oversight or misuse of facts that existed when the prior financial statements were prepared?

An error correction is not an accounting change. Distinguish errors (facts existed at the reporting date and were overlooked or misused) from estimate revisions (new information or later developments). A change from an accounting principle that is not generally accepted to one that is generally accepted is the correction of an error, not a change in accounting principle.

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Official guidance: FASB Accounting Standards Codification

Is the error material to any previously issued financial statements, considering both quantitative and qualitative factors?

Assess materiality for each affected period using the quantitative and qualitative framework of SEC Staff Accounting Bulletin No. 99. A common trap is netting offsetting misstatements; evaluate each error individually and in the aggregate, including the effect that correcting accumulated prior-period errors would have on the current period.

Material error - restate the previously issued financial statements under ASC 250-10-45-23. Error immaterial to prior periods - correct it in the current period and document the materiality assessment; SEC registrants evaluate the correction under SEC Staff Accounting Bulletin No. 108.

Official guidance: FASB Accounting Standards Codification

Which description best matches the change management intends to make?

Classification drives the reporting model: changes in principle are generally retrospective, changes in estimate are prospective, and changes in reporting entity are retrospective. A change in the method of depreciation, amortization, or depletion is a change in accounting estimate effected by a change in accounting principle under ASC 250-10-45-18, so it follows the prospective model but still requires a preferability justification.

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Official guidance: FASB Accounting Standards Codification

Is the entity adopting a principle for events or transactions occurring for the first time (or that previously were immaterial), or modifying a principle because the transactions are clearly different in substance from those previously occurring?

ASC 250-10-45-2 excludes two situations from change-in-principle accounting: initial adoption of a principle for events or transactions occurring for the first time or that previously were immaterial, and adoption or modification of a principle necessitated by transactions clearly different in substance from those previously occurring. Contemporaneous documentation of why the transactions are new or different is the key evidence.

Not a change in accounting principle under ASC 250-10-45-2 - apply the selected principle to the new or clearly different transactions without ASC 250 change reporting.

Official guidance: FASB Accounting Standards Codification

What is the basis for the change in accounting principle?

ASC 250-10-45-1 presumes that an accounting principle, once adopted, is not changed. A voluntary change is permitted only when the entity can justify the new principle as preferable. SEC registrants making a voluntary change generally must obtain a preferability letter from their independent accountant under Item 601(b)(18) of Regulation S-K. For mandated changes, read the Update's transition paragraphs before defaulting to the ASC 250 retrospective model.

Locate the transition and effective-date paragraphs of any newly issued Accounting Standards Update before selecting the reporting approach.

Official guidance: FASB Accounting Standards Codification

• FASB Accounting Standards Codification

Can the new depreciation, amortization, or depletion method be justified as preferable - for example, because it better reflects the expected pattern of consumption of the asset's economic benefits?

ASC 250-10-45-18 treats a change in depreciation, amortization, or depletion method as a change in accounting estimate effected by a change in accounting principle: the accounting is prospective, but ASC 250-10-45-19 still requires the new method to be justified as preferable. Do not restate prior periods; the remaining carrying amount is allocated over the remaining useful life under the new method.

Change in accounting estimate effected by a change in accounting principle - apply the new method prospectively under ASC 250-10-45-18, supported by the preferability justification required by ASC 250-10-45-19. The change may not be made - ASC 250-10-45-19 permits a change in estimate effected by a change in principle only if the new principle is justified as preferable.

Official guidance: FASB Accounting Standards Codification

Does the revision result from new information, subsequent developments, or better insight or experience - rather than from facts that were reasonably available when the prior estimate was made?

Estimates change as new events occur, as more experience is acquired, or as additional information is obtained; those revisions are accounted for prospectively and are not corrections of errors. If the driver is information that existed and was overlooked or misused at the prior reporting date, evaluate the item as an error, including whether it is material to the previously issued statements.

Change in accounting estimate - account for the revision prospectively in the period of change, and in future periods if both are affected, under ASC 250-10-45-17.

Official guidance: FASB Accounting Standards Codification

Does the change in the entities presented result from a business combination, an acquisition or disposal of a business, or a change in a consolidation conclusion for a variable interest entity?

A change in reporting entity is limited to a change that results in financial statements that are, in effect, those of a different reporting entity - for example, presenting consolidated or combined statements in place of statements of individual entities, or changing the entities included in combined statements. A business combination or a disposal is accounted for under the applicable transaction guidance, not as a change in reporting entity.

Not a change in reporting entity - account for the business combination or disposal under ASC 805 and the consolidation guidance in ASC 810, with no ASC 250 change reporting. Change in reporting entity - retrospectively apply the change to the financial statements of all prior periods presented under ASC 250-10-45-21.

Official guidance: FASB Accounting Standards Codification

Is retrospective application impracticable for one or more prior periods, after the entity has made every reasonable effort to apply the new principle?

ASC 250-10-45-9 sets a high bar: retrospective application is impracticable only if, after every reasonable effort, the entity cannot apply the requirement, if application requires assumptions about management's intent in a prior period that cannot be independently substantiated, or if it requires significant estimates for which information available in the prior periods cannot be objectively distinguished from hindsight. Cost or inconvenience alone does not qualify.

Apply the impracticability relief - adopt the new principle from the earliest date practicable under ASC 250-10-45-6 through 45-7 and disclose why retrospective application is impracticable. Apply the new principle retrospectively to all prior periods presented under ASC 250-10-45-5.

Official guidance: FASB Accounting Standards Codification