How Can You Justify that Change in Estimate?
You are a financial analyst and have been looking at the financial statements of Denethor Company. The notes to the financial statements reveal that Denethor changed its estimated depreciation lives for its manufacturing equipment. You calculate that without this change, Denethor would have had a reported loss instead of a reported profit for the year. The financial statement notes include the following justification for the change in estimate: “The changes in estimated depreciation lives were made to conform the Company’s depreciation estimates to those used by other manufacturers in the Company’s industry and to provide a more equitable allocation of the cost of equipment over their useful lives.” You have just received a call from a long time client who is considering investing in Denethor Company. Given this information, what will you tell this client?