Acct 212 Spring 2013
Values Integration Case: The Depreciation Dilemma
After 4 tough years at Malone University with Bert Smith (and others) as your professors, you graduated and landed a great entry-level position at a publicly held corporation. Your primary responsibilities are to maintain the detailed records of the company’s fixed assets; buildings, equipment, vehicles, etc. The job seems kind of limiting sometimes, but the prospects for promotion are great and you have to start somewhere. In the meantime, the money is pretty good and you feel blessed by being able to contribute to your church, pay off student loans and save some money.
Your responsibilities for keeping fixed asset records of course also include preparing the annual depreciation estimates. The company’s policies are relatively simple:
· Straight line depreciation for all assets. S/L is easily calculated and readily understood. It’s used by most of the other companies in your industry.
· A salvage value of $0 is consistently used. You know that realistically this is probably not correct, but it is the most conservative assumption since it leads to a higher annual expense. $0 salvage values are frequently used when the real number is not reliably known.
· Useful lives are based on asset classification, i.e. 7 years for vehicles, 30 years for buildings, 10 years for equipment. These estimates are based on the experience of the company and industry practice.
So all is cool until your boss, the controller of the company, enters your office with a worried expression on her face. She has just met with the CFO. Things are not looking good in profitability land. The company is not likely to meet the profitability predictions of stock analysts or management’s own predictions which were widely circulated in the business press. Failure to meet these expectations will undoubtedly have a negative impact on the stock price. This would lead to considerable pressure for significant cost cutting measures. These would certainly include employee lay offs. The controller reminds you that as a recent hire, you could be one of the first ones out the door.
But there is hope! The controller is seeking ways to boost profitability. She is having dozens of meetings like the one she is now having with you. With some cooperation and extra work she believes that the profitability targets can be achieved.
You eagerly offer your support and ask what you can do to help. The answer you get is simple, but distressing: “Rework the depreciation estimates”. It will take many, many, hours, even with the calculations done on Excel, but that’s OK; you’ve worked late nights before. Here’s the real issue; the controller expects depreciation expense to be considerably lower. She even gives you a target figure and discusses the options with you.
“Look. You know and I know”, the controller says, “ that the salvage values are understated. Increase them! And…we are planning to institute a new maintenance program and expect to make investments in new technology. Why, these changes are likely to increase the useful life of our assets by… uh, … YEARS! Yes, YEARS!”
The controller leaves your office, certain that you are “on board”, encouraging you to be “a team player” and reminding you of your responsibilities to the company stakeholders.
You start thinking. Yes, it would be easy enough to do as she expects. Depreciation is an estimate after all. But you also know that it will be very difficult to objectively substantiate the salvage value of the fixed assets. They are unique to your industry and there is virtually no market for them as used assets. Perhaps you could come up with estimated values for them as scrap metal, but that would not achieve the target expense reduction given you.
As for the useful lives of the assets, that is hugely subjective also. The ones currently used are substantiated by experience. New estimated lives based on “planned” implementation of preventive maintenance programs and new capital investment might be justified… or just wishful thinking.
Obviously you have a tough decision to make. You believe in doing what is right.
a. Briefly discuss the accounting issues involved. How would changing salvage
values and useful lives achieve the controller’s goal of increasing profitability?
b. State the moral dilemma apparent in this choice. Remember that a moral dilemma puts the decision maker “between a rock and a hard place”; two different courses of action that lead to different outcomes, both of which can be supported by positive Christian values. Prove that you have actually identified a dilemma by stating the positive Christian values and rules that could support the divergent actions; i.e. making the changes to the depreciation calculations desired by the controller, vs. not making the changes. The Christian values/rules stated should be scripturally supported. If you are stuck finding scripture that deals with depreciation expense (and of course you will be) think about Micah 6:8 and/or Matt 22:36-40. These verses illustrate some very far reaching Judeo/Christian values that can be applied to virtually any moral decision making case.
c. Identify the parties that will be affected by your decision.
d. Make a recommendation to resolve the dilemma. How will you handle the controller’s assignment? What would you do that would successfully promote the values on each side of the dilemma? Remember that a true resolution will NOT simply ignore one side of the dilemma. Try to achieve the good values identified on both sides. Support your conclusion thoroughly by applying scripturally supportable Christian values and rules.
e. Discuss the impact on the parties identified in part c. of following the action you have concluded to be morally right.
Your analysis should be word processed, 11-12 pitch font, one inch margins, double spaced. The case will be graded on the degree of complete and thoughtful analysis of the case. This includes a clear identification of the dilemma and a clear resolution for the dilemma, using scripturally supportable Christian values and rules.
There is no length requirement, though my experience indicates it takes at least 2-3 pages to adequately address this case. Organization and writing skills will also impact the grade. All outside sources should be cited appropriately. Lack of proper citations is plagiarism and will be treated as a violation of academic integrity.