DEFINITION of 'Accounting Change'
A change in accounting principles, accounting estimates, or the reporting entity. A change in an accounting principle is a change in a method used, such as using a different depreciation method or switching from LIFO to FIFO. An example of an accounting estimate change could be the recalculation of machine's estimated life due to wear and tear. The reporting entity could change due to a merger or a break up of a company.
Accounting changes require full disclosure in the footnotes of the financial statements to describe the justification and financial effects of the change. This allows readers of the statements to analyze the changes appropriately.
BREAKING DOWN 'Accounting Change'
A company generally needs to restate past statements to reflect a change in accounting principle. A change in accounting estimate does not need to be restated. In the case of any accounting change, users of the financial statements should examine the footnotes closely to understand what the changes mean and if they effect the true value of the company.