Question

Companies often are under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results.

1. How can a company manage earning by changing its depreciation method? Is this an effective technique to manage earnings?

2. How can a company manage earnings by changing the estimated useful lives of depreciable assets? Is this an effective technique to manage earnings?

Answer 1

Ans1: The company can defer their depreciation expenses for latter years by chnaging the depreciation method. As in case of the double declining method the depreciation in ezarly years will be higher than other methods liuke straight lin e method. So by changing the method company can increase its pofit in intial years. This method is not effective, as firstly the total depreciation expenses will be same in intial years expenses may be reduced but later on the expenses will increase, offesting all benefit. Secondly any such change had to be governed by requirement of accounting standards and requires complete disclosure.

Ans 2: By increasing the useful period of asset , the expenses per year will reduce . However it is not an effective technique because on many asset effective useful life is determined by the acts and rules made thereunder and any change from it is required to be properly justified and disclosed in the books of accounts.