What is Change in Accounting Estimate?
A change in accounting estimate is a revision of an amount that depends on judgement — useful life, residual value, expected credit losses, warranty reserves — because of new information or new developments. Under IAS 8, changes in estimates are recognized prospectively (current and future periods), not retrospectively.
How It Works
- Examples: extending the useful life of a machine, raising the doubtful-debts rate, revising the warranty assumption
- No restatement of prior periods — only current and future periods are adjusted
- Disclosed in the notes if material
- Distinguished from a change in accounting policy (which is usually retrospective) and from a correction of error (also retrospective)
- Frequent in contracts, depreciable assets, and impairment-sensitive areas
Saudi Context
Saudi companies revisit estimates each reporting date — particularly for ECL, useful lives of property revalued in the Saudi market, and warranty/return provisions in retail. SOCPA-aligned auditors test the reasonableness of estimates as part of the year-end audit.
Example
A Saudi manufacturer extends the useful life of a production line from 10 to 15 years based on actual operating data. Depreciation for the remaining years is recalculated on the new life — no restatement of prior years. The note discloses the change and its current-year impact.