Changes in accounting estimates occur when an entity, as a result of new information, is forced to make a new valuation of it’s estimated liabilities.
An accounting estimate is a calculation that a company performs on events that will occur in the future.
Due to it being an approximate calculation, this estimate may change as a result of new information that an entity receives over time.
Accounting estimates have the particularity they are exposed to different variables that prevent a company from knowing the exact amount that it should recognize in the financial statements.
For this reason, IAS 8 allows changes in accounting estimates to be recognized prospectively.
For example, an entity acquired a machine for 2,000,000, the entity’s management estimated useful life of 15 years.
However, after five years, based on the new information supplier provided, the company estimates the useful life should be 25 years instead of 15.
This economic fact is a change in an accounting estimate, as the change is the product of new information the entity received, information that the company did not have when calculating the initial estimate.
Changes in accounting estimates recognition
The difference between an accounting policy and an accounting estimate is that changes in estimates are recognized prospectively, while changes