Final answer:
A change in depreciation method is accounted for as a change in accounting estimate. Such changes are applied prospectively and require judgement in determining the asset's useful life and consumption pattern. The correct answer to the question is option a. change in accounting estimate.
Step-by-step explanation:
A change in depreciation method is treated as a change in accounting estimate. Depreciation is the process of allocating the cost of tangible assets over their useful lives and is a measure of the wearing out, consumption, or other loss of value of a depreciable asset arising from use, passage of time, or obsolescence through technology and market changes. It is an accounting estimate because it involves judgement by management about the useful life of the asset and the pattern in which the asset's economic benefits are consumed.
Accounting principles dictate that changes in accounting estimates are accounted for prospectively, meaning that the change is applied to the depreciation calculation from the date of the change onward. No adjustments are made to prior periods as would be the case with a change in accounting principle or an error correction. Therefore, when a company decides to change its method of depreciation from, for example, the straight-line method to the declining balance method, it is simply updating the estimate for how the asset's value is depreciated based on new information or a reassessment of the original estimate.
When there is a change in accounting principle, such as switching from one generally accepted accounting principle (GAAP) to another, companies must retrospectively restate prior period financial statements as if the new principle had always been used. This is not the case for changes in accounting estimates. Error corrections occur when past financial statements are found to be incorrect due to mistakes or omissions, requiring adjustments. Prior period adjustments are similar in that they also involve amending previously issued financial statements. However, they are for corrections of errors that are discovered in the current period concerning prior periods.
Therefore, in the context of a change in depreciation method:
The correct answer is: a. change in accounting estimate.