Question

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?

Answer 1

1. There may occur a situation where the useful life of assets may required to be changed, due to change in circumstances.
2. This is not an accounting error but the rate of depreciation will be affected with the change in the useful life of the asset.
3. If the useful life of asset is shortened, then it will lead to increase in the amount of depreciation and ultimately will affect the net income of the company.
4. For the given company, incentives are calculated based on the current profits, as a result, incentives will also get affected because of the change in useful life of the assets.
5. Therefore it is matter which requires top management decision and keen examination of assets inorder to consider changing the useful life.
6. But the alteration to the useful life should not be held back with the reason that it affects incentives to the management.
7. If it is necessary that the changed circumstances require altering changing in useful life it should be changed accordingly.
8. It should also be noted that, there must be a proper disclosure regarding the change in the useful life of asset and the effect on the net income because of such change.