FAR · Select transactions · 8 practice questions
Change in Estimate vs. Error Under ASC 250
New information changes an estimate; ignoring reliable information available when prior statements were issued creates an error. Below, compare the same warranty revision with only the source of information changed.
Try one first
Hint
Ask why management is changing the accounting: did the information arise after prior statements were issued, or was reliable information already available when those statements were prepared?
Answer B. ASC 250 indicates the controlling test is the timing and source of the information prompting the change. If the change responds to new information or new experience that arose after prior‑period statements were issued, it is generally accounted for prospectively as a change in estimate (often described for depreciation as a change in estimate effected by a change in accounting principle). If reliable information existed and was reasonably available when earlier statements were prepared and was not used, the matter is treated as an error that generally requires prior‑period correction (restatement).
Why not A: This is tempting because preferability is the test for voluntary changes in accounting principle, but preferability does not determine whether prior‑period accounting was incorrect; the timing/source of the underlying information does.
Why not C: This distractor reflects a common heuristic that depreciation‑related adjustments are prospective, but that is not dispositive: if the underlying reliable information predated issuance and was reasonably available, correction may be required rather than prospective treatment.
Why not D: Materiality affects disclosure and whether an error requires restatement, but it does not replace the underlying classification test that focuses on whether the information existed and was reasonably available when the prior statements were prepared.
Side by side
| Change in estimate | Prior-period error | |
|---|---|---|
| Lark's warranty rate | Revised from 2% to 5% | Revised from 2% to 5% |
| Information behind revision | New claims experience after prior statements were issued | Reliable claims data already available before prior statements were issued |
| Original accounting | Reasonable based on available information | Available claims data ignored |
| Classification | Change in accounting estimate | Correction of an error |
| Periods affected | Current period and affected future periods | Prior periods that were misstated |
| Comparative statements | No restatement | Restate affected prior periods for material errors |
| Opening retained earnings | No adjustment for this estimate change | Adjust for effects before the earliest period presented |
Key points
- Remember: Ask when the information became available, not when management discovered it.
- Materiality affects how an error is corrected, not whether it is an error.
- A later bad outcome does not make a reasonable original estimate an error.
How the exam traps you
- Calling every warranty-rate revision an estimate change. Check whether reliable claims data was available but ignored.
- Charging a material prior-period error to current-year warranty expense. Restate the affected comparative period; adjust opening balances for earlier effects.
- Restating a reasonable estimate because later claims were higher. New claims experience changes the estimate prospectively, beginning in the current period.
Question 2
Hint
Classify each event first: was the original accounting wrong, or did new information change a prior estimate?
Answer B. The omitted $300,000 warranty accrual is a material prior-period error; when comparative financial statements are presented, the prior-period statements should be restated to correct the error. The change in estimated remaining useful lives is a change in accounting estimate and is accounted for prospectively, affecting depreciation expense in 20X6 and later periods only.
Why not A: Tempting because both items were discovered in 20X6, but the accounting treatment depends on the nature of the item. A material prior-period error requires restatement of the prior-period financial statements (not simply recognition in current-year income), whereas a change in estimate is recognized prospectively.
Why not C: Although both items alter measurements, only an error (the omitted warranty accrual) is corrected by retrospective restatement. A revised estimate (useful lives) reflects new information and is not corrected retrospectively; it is applied prospectively.
Why not D: This is incorrect because when comparative statements are presented, a material prior-period error is corrected by restating the prior-period comparatives rather than by an opening retained earnings adjustment. Also, change in estimate is not a cumulative-effect adjustment; it is recognized prospectively.
Question 3
Hint
Ask whether the new usage data means prior depreciation was wrong when recorded, or whether it simply updates expectations going forward.
Answer B. A revision of useful life based on new information is a change in accounting estimate under U.S. GAAP. Changes in estimate are accounted for prospectively, so Grove should take the asset's carrying amount at Jan. 1, Year 3 and depreciate it over the remaining revised life. Prior-year financial statements are not restated and no cumulative catch-up adjustment is recorded.
Why not A: This describes retrospective restatement and an adjustment to beginning retained earnings, which are treatments for certain changes in accounting principle or error corrections, not for changes in estimates.
Why not C: A change in estimate does not require a cumulative 'catch-up' entry. Instead, the remaining carrying amount is depreciated prospectively over the revised remaining life.
Why not D: An error correction applies when prior-period accounting was incorrect based on information available at the time. A later change resulting from new information is a change in estimate, not an error.
Question 4
Hint
Focus on what separates a later revision of judgment from a prior-period mistake: ask what was known, or reasonably knowable, when the original amount was recorded.
Answer B. The classification hinges on whether the prior amount was a reasonable estimate given the facts known or knowable at that time. A good-faith estimate later revised because new information emerges is a change in estimate and is accounted for prospectively; only a mistake or omission of information known (or reasonably knowable) when the original amounts were recorded would be treated as an error requiring correction.
Why not A: Materiality affects whether prior-period financial statements require restatement, but it does not determine whether the original amount was an estimate made in good faith. The key test is the reasonableness of the original estimate given information available at that time.
Why not C: This concerns the mechanism used to record costs, not whether the prior-period amount resulted from a reasonable estimate or a mistake. The recording method doesn't change the classification between an estimate revision and an error correction.
Why not D: That a revision will affect current and future periods is a typical consequence of a change in estimate (prospective effect), but it is not the governing test. The primary question is whether the original estimate was reasonable when made.
Question 5
Hint
Focus first on the nature of each item: is management fixing a mistake in prior reporting, or updating a reasonable estimate because of new information?
Answer D. That distinction is the key governing factor. Under U.S. GAAP, correcting a material omission caused by a clerical mistake in previously issued statements is an error correction, which is handled retrospectively; revising useful life because of new information is a change in estimate, which is handled prospectively because the original estimate was reasonable when made.
Why not A: The direction of income effect does not determine whether an item is accounted for retrospectively or prospectively under GAAP; the nature of the item (error vs estimate) does.
Why not B: This is tempting because the facts involve different account types, but GAAP treatment is determined by whether the item is an error or an estimate change, not by whether a liability or an asset is affected.
Why not C: Both items were identified after the Year 3 statements were issued, so the mere timing of discovery does not explain the different accounting treatments; the distinction is error versus estimate.
Question 6
Hint
Ask whether the company changed a method, corrected a mistake, or updated an estimate using new information.
Answer A. This is a change in accounting estimate because Nolan is revising the machine's useful life based on new information obtained in Year 2. Under U.S. GAAP, changes in estimates are accounted for prospectively (adjusting depreciation going forward), so prior-period financial statements are not restated. The stem also makes clear that the depreciation method did not change and that the original estimate was reasonable when made.
Why not B: This is tempting because depreciation topics can involve accounting principles when a company changes depreciation methods. However, Nolan is not changing methods (still straight-line); it is revising an estimate of useful life, so this is not a principle change requiring retrospective application.
Why not C: This may seem plausible since the estimate changed, but a correction of an error applies only if the original estimate or accounting was incorrect given the information then available. The stem states the original 10-year estimate was reasonable when made, so the revision is not an error but a new estimate.
Why not D: This distractor mixes concepts: an estimate effected by a principle change would require changing the underlying accounting method or principle. Here, no accounting principle or method changed, only the useful-life estimate, so this classification does not apply.
Question 7
Hint
Decide separately whether each fact reflects new estimate information about future usage (a change in estimate) or evidence that previously selected accounting was not applied (a prior-period error).
Answer B. ASC 250 distinguishes changes in accounting estimates (accounted for prospectively) from corrections of errors (corrected by restating prior-period financial statements when practicable). The reduced remaining useful life and elimination of residual value based on new engineering information represent a change in estimate and are accounted for prospectively. The depreciation system's historical failure to apply a residual value that management had explicitly approved is evidence that a previously selected method or assumption was not applied and should be corrected as a prior-period error.
Why not A: Materiality affects whether previously issued financial statements must be revised, but materiality alone does not determine whether an item is a change in estimate or a correction of an error; that classification depends on the nature of the condition (new information versus prior misapplication).
Why not C: Although both matters relate to the same asset, GAAP requires separate evaluation of each issue's nature; they can require different accounting treatments (prospective change in estimate versus prior-period error) even when affecting the same asset.
Why not D: Useful life and residual value are estimation inputs, but a longstanding failure to apply a residual value that management had selected is a misapplication of the chosen accounting method and is treated as a prior-period error rather than a routine change in estimate.
Question 8
Hint
Focus on whether the new information changes an estimate, corrects an error, or changes an accounting principle.
Answer B. A revision to useful life or residual value is a change in accounting estimate. Under U.S. GAAP, changes in estimate are accounted for prospectively, use the asset's carrying amount at the date of change, apply the new residual value, and depreciate the remaining amount over the revised remaining life. Pine should revise depreciation beginning in Year 4 and in future periods; prior-year statements are not restated.
Why not A: This is tempting because an estimate changed, but the facts state there were no prior-period errors. A change in estimate results from new information and is not an error correction, so it is not accounted for by restating prior periods.
Why not C: Some accounting changes (principles) require retrospective adjustment, but revising useful life or residual value is not a change in accounting principle, it is a change in estimate handled prospectively.
Why not D: Consistency matters, but estimates are updated when new information arises. U.S. GAAP requires prospective adjustment of depreciation for revised estimates; only an impairment would change accounting due to loss in value.
Common questions
What is the difference between a change in estimate and an error under ASC 250?
A change in estimate reflects new information after a reasonable original estimate. An error means prior accounting was wrong based on information reasonably available when the statements were issued.
Does a change in warranty estimate require restatement?
No, if the prior estimate was reasonable and the revision reflects new claims experience. Recognize the revision in the current period and future periods it affects.
Do prior-period errors go through current-year income?
A material prior-period error is corrected by restating affected comparative statements, not by charging current-year income. Adjust opening retained earnings of the earliest period presented for effects arising before that period.
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