ASC 250 Accounting changes and error corrections

ASC 250 provides guidance on the accounting for and reporting of accounting changes, including a change in accounting principle, a change in accounting estimate and a change in reporting entity. ASC 250 provides that a change in accounting estimate that is effected by a change in accounting principle (e.g., a change in depreciation method for long-lived assets) is accounted for as a change in estimate.

ASC 250 applies to financial statements of business entities and not-for-profit organizations (collectively referred to herein as "entities"). ASC 250 also applies to historical summaries of information based on the primary financial statements that include an accounting period in which an accounting change or error correction is reflected, such as the selected financial data SEC registrants may elect to disclose in their filings.

ASC 250 presumes that, once adopted, an accounting principle (including the method of applying that principle) shall not be changed in accounting for events or transactions of a similar type. ASC 250-10-45-1 provides that the following are not changes in accounting principle: a. The initial adoption of an accounting principle in recognition of events or transactions occurring for the first time or that previously were immaterial in their effect. And b. The adoption or modification of an accounting principle necessitated by transactions or events that are clearly different in substance from those previously occurring.

ASC 250 requires entities to report a change in accounting principle through retrospective application of the new principle to all prior periods, unless it is impracticable to do so. 

Retrospective application of a change in accounting principle requires the following: a. The cumulative effect of the change to the new accounting principle on periods prior to those presented is reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. b. An offsetting adjustment, if any, is made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period. c. Financial statements for each individual prior period presented are adjusted to reflect the period specific effects of applying the new accounting principle.   

ASC 250-10-45-17 requires a change in accounting estimate to be accounted for in (a) the period of change if the change affects that period only or (b) the period of change and future periods if the change affects both. As such, a change in accounting estimate shall not be accounted for by restating or retrospectively applying the change to prior periods or by reporting pro forma amounts for prior periods.

For a change in accounting estimate that affects several future periods, entities are required to disclose the effect of the change on income from continuing operations, net income (or other appropriate captions of changes in the applicable net assets or performance indicator), and any related per-share amounts of the current period. An example of a change that would affect several future periods is a change in service lives of depreciable assets. In contrast, disclosure of the effects is not necessary for estimates made each period in the ordinary course of accounting for items such as uncollectible accounts or inventory obsolescence. However, disclosure is required if the effect of such a change in estimate is material.