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Why is change in method of valuing inventory a Change in accounting policy and change in method of depreciation a change in accounting estimate.
Is it because the Inventory is an operating asset ?
Change in acc estimate is when (according to becker’s)
1. there is a change in value of the carrying amount of the asset, or
2. there is a change in the value of consumption of the asset.method of depreciation changes the annual consumption value of the asset so it is a estimate change, but change in method of inventory valuation increases/decreases the value of the carrying amount of the inventory, then why is it not a change in estimate but a change in accounting policy. I am confused..
The policy of depreciating an asset is a way of writing off that asset over its useful economic life
If we change the method of depreciation, that’s simply an adjustment that was felt to be necessary to write off the cost of that asset over its useful economic life … thus, it’s a change in estimate (either of the length of useful economic life or the profile of the use of that asset)
With reference to inventory, a change in base – for example from FIFO to Average Cost – is a change in policy because it measures the inventory on a different conceptual basis
With FIFO, inventory is valued at actual cost whereas Average Cost values closing inventory at an amount that represents average cost of opening inventory + the average cost of purchases made through the year
Yet we know the value of inventory on a FIFO basis so to measure on an average basis is to apply a different measurement base
And measurement is one of the three considerations that have to be taken into account when assessing any matter for inclusion within a set of financial statements – the other two being “recognition” and “presentation”
Does that explain it for you satisfactorily?
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