How should changes in accounting estimates be handled?

Changes in accounting estimates should be handled prospectively, which means that these changes are applied to the current period and future periods but do not affect past financial statements. The rationale behind this approach is that estimates are inherently uncertain, and new information may lead to changes in future estimates. This prospective treatment ensures that the financial statements provide a more accurate portrayal of the entity’s financial position and performance going forward, without the need to adjust prior periods, which could misrepresent the historical performance of the business.

For instance, if a company revises its estimate of the useful life of a piece of machinery, the adjustment will impact depreciation expense in the current and future periods but will not retroactively amend previously reported expenses. This helps maintain the consistency and comparability of financial statements across periods.