Question

James Wright is the chief financial officer (CFO) for The Butcher Block, a major steakhouse restaurant chain. As CFO, James has the final responsibility for all aspects of financial reporting. James tells investors that The Butcher Block should post earnings of at least $1 million.

      In examining the preliminary year-end numbers, James notices that earnings are coming in at $950,000. He also is aware that The Butcher Block has been depreciating most of its restaurant equipment over a five-year useful life. He proposes to change the estimated useful life for a subset of the equipment to a useful life of seven, rather than five, years. By depreciating over a longer useful life, depreciation expense will be lower in the current year, increasing earnings to just over $1 million. It looks like The Butcher Block is going to exceed earnings of $1 million after all.

     Do you think James Wright’s change in the depreciable life of assets is ethical? What concerns might you have?

Answer 1

Change in Useful life of an assets is called as change in accounting estimation.
Change in useful life required if :
(a) There is change in pattern of use of that assets,
(b) Any technological changes related to that assets
So, it is very clear that change in useful life of assets by the CFO James Wright from
5 year to 7 year is not due to the above listed reason but as required to report profit
above $ 1 millions, so reduced depreciation by enhancing useful life is not appropriate
and ethical.