Ethical Dilemma (Changing a Change in Principle)
Your company has recently decided to change its method of depreciating long term assets to be consistent with major competitors. While your company has used the straight line method in the past, most other companies in the industry use a declining balance method. Preliminary computations indicate that the effect of changing this accounting principle will be to reduce EPS by about 10% in the current year. Naturally, those to whom you report would like to know if there is any way to lessen the impact of this change. You know that other factors in computing depreciation expense are the estimates of useful life and salvage value. You reason that if the estimated useful life of all long term assets is reassessed with minor modifications being made to these estimated lives, then switching the depreciation method will not decrease net income this period.
1. Can the plan of reassessing the estimated lives of long term assets achieve the desired result of allowing the firm to change depreciation accounting methods to a declining balance method without reducing net income this period?
2. Will the firm have a higher cash inflow as a result of either the change in principle or the change in estimate?
3. Should the level of a company’s income determine the accounting methods that it uses and the accounting estimates that it makes? Why or why not?