Question

When calculating depreciation under GAAP there are assumptions related to estimates with respect to useful life and residual value. How may ethics play a role in estimating these values?

Sometimes a business needs to decide between capitalizing /Depreciation a cost versus expensing it in the period. What are some of the ethical concerns that could impact this decision and why?

Answer 1

while calculating the depreciation under GAAP the assumption related to useful life and residual value is to know that how much expense to charge. Those assumption effect both net income and book value of the asset. Further they have impact on the earnings if the asset is ever sold for a gain or a loss when compared to its book value.The assumption used are discussed in footnotes to the financial statement which is something for the investors to be aware of.Furthermore if the company routinely recognizes gain on sale of asset it would have material impact on total net income because of which  the financial reports to be investigated more throughly.

To Expense a cost indicates it is included on the income statement and subtracted from revenue to determine profit. Capitalizing indicates that the cost has been determined to be a capital expenditure and is accounted for on the balance sheet as an asset,

With the depreciation showing up on the income statement it is suggested only for the items which is used for a year or less than 12 months ( the only consideration is the timing difference). to expense a depreciation might result in extra ordinary low income which is not good for the organisation also do not satisfy the GAAP or other standard as issued by concerned authorities.

The purpose of capitalizing costs is to better line up the cost of using an asset with the length of time in which the asset is generating revenue .Fixed assets are generally expensive in nature and it is used for a long period of time which helps to generate revenue for the organisation.And therefore it is advisable to capitalizing.