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Changes in accounting estimates result from new information. Common examples of such changes include changes in the useful lives of property and equipment and estimates of uncollectible receivables, obsolete inventory, and warranty obligations, among others.

The first is a correction of an error in the financial statements that was reported for a prior period. The second type of prior period adjustment was caused by the realization of the income tax benefits arising from the operating losses of purchased subsidiaries before they were acquired.

Changes in estimates, such as the estimated useful like for a tangible asset or the bad debt allowance percentage, are accounted for on a prospective basis. This means that the current and future financial statements must reflect the change, but the company does not need to change historical periods.

Estimate changes occur when the carrying values of assets or liabilities are changed. These changes are accounted for in the period of change. Changes in accounting estimates don't require the restatement of previous financial statements.

Examples of Changes in Accounting Estimate Allowance for doubtful accounts. Reserve for obsolete inventory. Changes in the useful life of depreciable assets. Changes in the salvage values of depreciable assets. Changes in the amount of expected warranty obligations.

A change in an accounting estimate is: c. Reflected in current and future years' financial statements, not in prior statements. If the restatement impacts prior periods, then prior period statements are amended as well.

Any changes made in the accounting estimates arise due to new information of developments, which are not considered as errors. However, the effect of such changes are recognized in accounting prospectively and they are included in the income statement.

The effect of a change in an accounting estimate is recognised prospectively by including it in profit or loss in: the period of the change, if the change affects that period only; or. the period of the change and future periods, if the change affects both.

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