A company depreciates a machine over an estimated 10-year useful life. After 4 years, new information indicates the machine will in fact only remain usable for a further 4 years (8 years in total), so the company revises the depreciation charge for the remaining years accordingly, without restating the depreciation already charged in the first 4 years. Under IAS 8, how is this change classified and applied?
- As a correction of a prior period error, requiring retrospective restatement of the financial statements for the first 4 years
- As a change in accounting estimate, applied prospectively so that only the current and future periods' depreciation charges are affected
- As a change in accounting policy, requiring retrospective application as if the 8-year useful life had been used from the start
- As a change in accounting policy, but applied prospectively, because retrospective application of a policy change is never permitted under IAS 8
Why B? And why not the others?
Correct answer: B. As a change in accounting estimate, applied prospectively so that only the current and future periods' depreciation charges are affected
Revising an asset's estimated useful life in light of new information is a change in accounting estimate under IAS 8, and changes in accounting estimate are applied prospectively — only the current and future periods' depreciation charges change, while amounts already recognised in earlier periods are left untouched. The option treating this as a prior period error is wrong because nothing about the original 10-year estimate was mistaken given the information available at the time; a later change in circumstances or better information does not turn a reasonable earlier estimate into an error requiring restatement. The option treating this as a change in accounting policy requiring full retrospective restatement misclassifies the type of change altogether — a revised useful-life estimate is not a change in the method or basis used to account for a class of transactions, which is what a policy change involves, so the retrospective-application requirement that attaches to policy changes does not apply here. The option that reaches the correct prospective treatment but justifies it by claiming retrospective application of a policy change is 'never permitted' is wrong on that reasoning, since IAS 8 does require retrospective application for a genuine change in accounting policy unless it is impracticable to determine the effects.
Source: IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraphs 32, 36-38 (accounting for changes in accounting estimates; prospective application)