Question

In: Accounting

You have been asked to review the useful lives of your company's fixed assets and recommend...

You have been asked to review the useful lives of your company's fixed assets and recommend any appropriate changes. Your company uses incentive compensation broadly across management levels and the incentives are tied to current profits. If you recommend shorter useful lives it will have an adverse impact on profits in the short term. How should you approach this assignment?

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Expert Solution

An iaccounting-based iincentive iis idesigned ito icompensate icorporate iexecutives ibased ion iperformance imeasures isuch ias iearnings iper ishare iand ireturn ion iequity. iOther iperformance imeasures ithat icompanies icommonly iuse ito igauge iexecutive iperformance iinclude icash iflow, ireturn ion iassets, ioperating iincome, inet iincome, iand itotal ishareholder ireturn.

i i i i i i i i i i i i i i i i i i i i iAccounting ibased iincentives itypically ireward iperforming iexecutives iwith icash iand icompany istock ior iemployee istock ioptions. iIn ifirms iof iall isizes, iincentive ipay icommonly icomprises ia isignificant iportion iof ian iexecutive's icompensation.

i i i i i i i i i i i i i i i i i i i i iAn iaccounting-based iincentive iis idesigned ito icompensate icorporate iexecutives ibased ion iperformance imeasures. iCompanies ican iuse ia ihost iof idifferent imetrics ion iwhich ito ibase ibonuses, iincluding iIndividual isalary ilevels, ifirm-wide iperformance inumbers, iand iperformance ifigured ifor ia iparticular ibusiness iunit. iOpponents ito ithese iprograms ibelieve ithey imay ipresent ipotential iconflicts iof iinterest, iby itying ithe ifirm’s iperformance ito ian iexecutive's ipaycheck, iwhich icould itrigger ihigh-risk idecisions

There imay ioccur ia isituation iwhere ithe iuseful ilife iof iassets imay irequired ito ibe ichanged, idue ito ichange iin icircumstances. iThis iis inot ian iaccounting ierror ibut ithe irate iof idepreciation iwill ibe iaffected iwith ithe ichange iin ithe iuseful ilife iof ithe iasset. iIf ithe iuseful ilife iof iasset iis ishortened, ithen iit iwill ilead ito iincrease iin ithe iamount iof idepreciation iand iultimately iwill iaffect ithe inet iincome iof ithe icompany.

i i i i i i i i i i i i i i i i i i i i i i i i ii iFor ithe igiven icompany, iincentives iare icalculated ibased ion ithe icurrent iprofits, ias ia iresult, iincentives iwill ialso iget iaffected ibecause iof ithe ichange iin iuseful ilife iof ithe iassets. iTherefore iit iis imatter iwhich irequires itop imanagement idecision iand ikeen iexamination iof iassets iin iorder ito iconsider ichanging ithe iuseful ilife. iBut ithe ialteration ito ithe iuseful ilife ishould inot ibe iheld iback iwith ithe ireason ithat iit iaffects iincentives ito ithe imanagement.

i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i iIf iit iis inecessary ithat ithe ichanged icircumstances irequire ialtering ichanging iin iuseful ilife iit ishould ibe ichanged iaccordingly.It ishould ialso ibe inoted ithat, ithere imust ibe ia iproper idisclosure iregarding ithe ichange iin ithe iuseful ilife iof iasset iand ithe ieffect ion ithe inet iincome ibecause iof isuch ichange.


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