A company discovers that in its prior-year financial statements, depreciation expense was calculated using the wrong useful life because of a data-entry mistake, not because of a genuine change in estimate. Under ASC 250 (Accounting Changes and Error Corrections), how should this be corrected?
- As a change in accounting estimate, applied prospectively from the date of discovery
- As an error correction, requiring restatement of the prior-period financial statements
- As a change in accounting principle, applied retrospectively with a cumulative-effect adjustment
- By disclosing the mistake in the notes only, with no adjustment to any reported figures
Correct answer: B. As an error correction, requiring restatement of the prior-period financial statements
ASC 250 distinguishes error corrections, which fix mistakes such as mathematical errors, data-entry mistakes, or misapplication of GAAP that existed in previously issued statements, from changes in accounting estimate or changes in accounting principle. Because the useful life used was simply wrong due to a data-entry error rather than a genuine reassessment of the asset's expected life, this qualifies as an error, and ASC 250 requires restating the prior-period financial statements to correct it, making the second option correct. The first option misclassifies a data-entry mistake as a legitimate re-estimate, which would only apply if new information had genuinely changed management's judgment about the asset's useful life going forward, not if the original figure was simply keyed in incorrectly. The third option confuses this with a voluntary or mandated change in accounting principle, which is corrected through retrospective application, a mechanism reserved for switching between acceptable methods, such as FIFO to weighted-average, not for fixing mistakes. The fourth option understates the requirement, because disclosure alone is insufficient when the underlying reported numbers were factually wrong and must actually be corrected.
Source: FASB Accounting Standards Codification: ASC 250, Accounting Changes and Error Corrections