An interesting phenomenon can sometimes occur when companies are in danger of not meeting their projected earnings goals. Management suddenly realizes that they have been far too conservative in their previous estimates associated with bad debts, estimated useful lives of equipment, and residual values, to name a few. With this newfound realization, management proceeds to revise these estimates to, as is often stated, “more closely reflect economic reality.”
What is the primary difference in financial statement disclosure between a change in estimate and a change in principle? Why do you think managers who are in danger of not meeting their goals would prefer to revise an accounting estimate rather than change an accounting principle?