An Inconsistency In The Method Of Accounting For Changes In Estimate: Variable Stock Plans

A change in accounting estimate should be accounted for in: 1. the period of change and future periods if the change influences both, or 2. the period of change if the change affects only that period. The accounting process involves making estimates and selecting methods. A necessary consequence of these activities is that circumstances may change and thereby necessitate revising an estimate or selecting a different method. An inconsistency problem between the accounting for variable stock plans and the accounting for other situations involving changes in accounting estimate is used to illustrate that changes in the variable stock area should be accounted for using the prospective method. The Financial Accounting Standards Board (FASB) is considering an exposure draft on accounting for stock compensation plans. However, the FASB should reexamine the entire issue of measurement, including the method applied and the circumstances under which that method best reflects operating income when variable stock options are used as compensatory rewards.