Change in accounting method

What it means

A change in accounting method is a switch to a different way of recording, measuring or presenting items from the one the company used before. Examples include changing the inventory recording method from method A to method B, changing the cost formula for issues of stock, changing the depreciation method or changing accrual policies. The company sets its methods in an internal policy.

Slovak rules require accounting methods to be applied consistently. A change is permitted only if it gives a truer picture, and generally only from the first day of an accounting period. The reason for the change and its effect on assets, liabilities and the result must be described in the notes to the financial statements.

A change in method must be distinguished from a change in accounting estimate, such as revising an asset's expected useful life, which is applied prospectively and can be made during the year. It also differs from correcting prior period errors, where past accounting was wrong.

How it works in practice

Method changes most often come with company growth, a new business model or a new system, for example moving to a warehouse system that allows perpetual inventory records. The decision should be backed by an analysis of the benefits and documented by amending the internal policy before the new period starts.

Transitional entries also need handling. When moving from method B to method A for inventory, for example, opening balances are booked to the stock accounts on the first day of the period. When changing the depreciation method, the depreciation schedule is adjusted. These steps should be prepared with the accountant in advance so the transition goes smoothly.

A change in accounting method can have tax consequences, especially if it affects the timing of costs or income. Where the change alters the result, it must be assessed how the difference flows into the tax base. We recommend consulting a tax adviser and informing the auditor, if there is one, before making the change.

What to watch out for

The most common mistake is changing a method during the year or without justification, often to improve the reported result. Such a change breaches the consistency principle and the auditor will object. Frequent method changes also make year-to-year comparison harder for banks and investors.

Beware of missing disclosure too. If a company changes a method but does not describe it in the notes, readers may not understand why results changed. That can lead to wrong decisions and criticism in an inspection. Describing the effect of the change is a mandatory part of the financial statements.