Question

A publically traded company more than doubled its EPS by changing depreciation methods. In justifying the change, management supported the change as follows: In comparison to direct competitors, the previous depreciation method was more conservative and thus had a negative impact on earnings. Although difficult to prove, there is considerable evidence that accounting changes are made for reasons other than improved financial reporting. GAAP are flexible in the initial selection of accounting methods and in making subsequent changes. However, the accounting standards specifically require that only changes to preferable accounting methods be made. Does this violate GAAP? Is this ethical? What would be an alternative course of action?  

Answer 1

No It's Not voilating the GAAP and this is ethical because a company may decide to change the depreciation method it applies to a fixed asset, for Example if an asset loses much of its value early on, a company might switch from straight line to accelerated depreciation.

Statement 154 of the US Financial Accounting Standards Boards describes this as a change on the accounting estimate for the assets depreciation, which in turn signals a change in accounting principal for the company. The change of accounting estimate alters the pace at which depreciation accumulates and thus affects the carrying value of asset i.e purchasing cost less accumulated depreciation on the balance sheet over time.

You normally must file IRS form 3115, application for change in accounting method you apply to a fixed asset. you must include a justification for your action and any supporting document. Under certain circumstances, the IRS allows you to combine multiple assets in a single filling form 3115. The IRS will notify you of their decision to accept or reject your request. You must also post a footnote in your annual report announcing the change in depreciation method and the reason for making the change.