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Dear Tutor,
Thank you for your great lectures on F7.
I am a little confused about change in accounting estimate and policy when we have a change in the method of valuation.
Why changing from FIFO to AVCO in inventory valuation is treated as a change in accounting policy while changing from straight line to reducing balance method in depreciation expense is treated as a change in accounting estimate? In both cases we are changing the method!! why its not the same?
Could you please help.
Thank you very much
Hi,
Thanks for the kind comments, they’re much appreciated.
You are correct that going from FIFO to AVCO is a change in policy as it is changing the way that we measure the inventory value.
A change from straight line to reducing balance is a change in estimate and is never a change in accounting policy. The measurement is the depreciation itself, not how it is being measured. Effectively the accounting policy is to charge depreciation, and we are jsut changing the estimate of that depreciation policy.
Hope that clears it up, let me know if you’re still confused.
Thanks
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