A change in accounting estimate does not require a retrospective application, as opposed to changes in accounting principles, reporting entities, and reporting periods, which usually do.
The question refers to situations that may require retrospective application when there is a change in accounting practices or the reporting framework of an entity. Applying retrospective application means that the financial statements are re-presented as if the new accounting policy or reporting standard had always been in place.
The answer to the question is: 2) A change in accounting estimate. This does not require retrospective application because an accounting estimate is inherently prospective, dealing with current and future conditions, and is adjusted in the period of change and future periods if the change affects both.
In contrast, the following do require retrospective application:
- A change in accounting principle requires retrospective application unless it is impracticable to determine the period-specific effects or the cumulative effect of the change.
- A change in reporting entity occurs when, for example, there is a consolidation of a new subsidiary, and financial statements must be adjusted to present figures as if the new structure had always existed.
- A change in the reporting period involves a change in the fiscal year-end, requiring the restatement of previous financial statements to conform to the new reporting period for comparative purposes.