Answer:
Change in accounting estimate.
Explanation:
IAS-8 deals with the accounting policies, change in accounting estimates and policies. This standard deals with following changes:
- Change in reporting entity --- It is a change in reporting entity. An example of it can be preparation of consolidated financial statements.
- Change in accounting estimate --- It is a change in any of the prior estimates because the management is now exposed to more information and believe that doing so would enhance the fairness of financial statements. For example, depreciation method.
- Change in accounting principle --- It is a change from on GAAP to the more preferable one. For example, the management might decide to change its inventory cost flow assumption from FIFO to Average-costing.
- Correction of an accounting error - The correction of accounting errors like commission error and error of principle.
The standard states that these changes must be made under two methods:
- Retrospective --- When we are required to change prior year statements.
- Prospective --- Adjusting the current and future estimates.
Each change/correction is accounted for under specified method as prescribed by the accountancy regulatory body. The effect of change in reporting entity, accounting principle, and correction of an error are retrospective. It means that the prior year financial statements must be adjusted. Whereas, the change in accounting estimate has a prospective effect. It means that the current and future statements should reflect the change and not the prior ones.
