The Impact of Changes in Accounting Policies and Accounting Estimates on Financial Reporting

Abstract

The evolving landscape of financial reporting necessitates continuous updates and modifications in accounting policies and estimates to ensure the relevance and reliability of financial statements. This article explores the impact of changes in accounting policies and accounting estimates on financial reporting. This study highlights the significance of consistency and transparency in the application of accounting policies and the formulation of estimates by analyzing the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). Modifications in accounting policies, whether due to regulatory updates or management's strategic decisions, can have a substantial impact on how an entity’s financial position, performance, and cash flows are presented and understood. Likewise, accounting estimates, which require judgments and assumptions regarding uncertain future events, can influence major financial statement components, including asset valuations, impairment charges, and provisions. The article explores the reasons for these changes, the steps required for their implementation, and their impact on various stakeholders such as investors, regulators, and auditors. It underscores the importance of strict disclosure standards to reduce the risk of financial misrepresentation and improve comparability across different reporting periods. The relationship between accounting policies and estimates is examined in depth to assess their combined effect on the quality of financial information. Additionally, the study points out the difficulties entities encounter in adhering to evolving accounting standards while ensuring consistency in their financial reporting. The evolving landscape of accounting standards requires constant review and adaptation of accounting policies and estimates to uphold the quality and trustworthiness of financial reporting. This paper offers insights into both the theoretical and practical effects of such changes, enhancing comprehension of their significance in financial reporting and their influence on stakeholders' decision-making. It emphasizes the need for continuous research and active discussions among professionals, standard-setters, and scholars to address the challenges linked to modifications in accounting policies and estimates, with the goal of achieving improved precision, relevance, and dependability in financial reporting. DOI: https://doi.org/10.53486/dri2024.22; UDC: 657.37:006.32; JEL: M41