Under GAAP, how should changes in accounting estimates be treated?

Under GAAP, how should changes in accounting estimates be treated?

• A. They should be applied retroactively
• B. They should be disclosed but not adjusted
• C. They should be ignored in future reporting
• D. They should be treated as a prior period adjustment

Answer: (B)

Changes in accounting estimates should be disclosed but not adjusted, aligning with GAAP's treatment of such changes. This approach acknowledges that estimates are inherently subject to revision as new information becomes available. When an estimate changes, it affects current and future periods, and the adjustment is made prospectively rather than retroactively. This means that the financial statements will reflect the new estimate moving forward, but prior periods remain unchanged, thus preserving the integrity and comparability of historical financial data. This treatment also focuses on providing users of the financial statements with relevant and timely information while allowing businesses the flexibility to adapt to new circumstances. By including disclosures about the changes, entities maintain transparency with stakeholders regarding the nature and impact of those estimates, enhancing the overall reliability of the financial reports.

Changes in accounting estimates should be disclosed but not adjusted, aligning with GAAP's treatment of such changes. This approach acknowledges that estimates are inherently subject to revision as new information becomes available. When an estimate changes, it affects current and future periods, and the adjustment is made prospectively rather than retroactively. This means that the financial statements will reflect the new estimate moving forward, but prior periods remain unchanged, thus preserving the integrity and comparability of historical financial data.

This treatment also focuses on providing users of the financial statements with relevant and timely information while allowing businesses the flexibility to adapt to new circumstances. By including disclosures about the changes, entities maintain transparency with stakeholders regarding the nature and impact of those estimates, enhancing the overall reliability of the financial reports.