A company has depreciated a machine using the double-declining-balance method since acquisition. Management now determines that the straight-line method better reflects the pattern of the machine's economic benefit and switches methods starting this year. How should this change be accounted for under ASC 250?
- As a change in accounting principle, requiring retrospective restatement of all prior periods presented as if straight-line had always been used
- As a change in accounting estimate effected by a change in accounting principle, applied prospectively over the machine's remaining useful life, with no restatement of prior periods
- As a correction of an error, requiring restatement of prior period financial statements and disclosure of the error's nature
- As a change in accounting principle for which retrospective application is impracticable, so the cumulative effect is recorded as an adjustment to the opening balance of retained earnings in the earliest period presented
Why B? And why not the others?
Correct answer: B. As a change in accounting estimate effected by a change in accounting principle, applied prospectively over the machine's remaining useful life, with no restatement of prior periods
ASC 250-10-45-17 specifically classifies a change in the depreciation, amortization, or depletion method for long-lived, nonfinancial assets as a change in accounting estimate effected by a change in accounting principle. Because separating the effect of the revised estimate of the asset's consumption pattern from the effect of adopting a new method is impracticable, the change is accounted for prospectively, like a pure change in estimate, over the asset's remaining useful life, with no restatement of prior periods. Option A applies the general retrospective-restatement treatment for ordinary changes in accounting principle, which ASC 250 specifically carves depreciation method changes out of. Option C is wrong because switching from one legitimate depreciation method to another is not a misapplication of GAAP, so error-correction guidance doesn't apply. Option D describes the impracticability cumulative-effect exception used for certain principle changes, such as inventory costing methods, when retrospective application genuinely cannot be done — not the rule for depreciation method changes, which are prospective by design, not because retrospective application happens to be impracticable.
Source: FASB ASC 250-10-45-17 (change in accounting estimate effected by a change in accounting principle)