Question

A manufacturer of electric power transmission and distribution equipment 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.

Comment on the appropriateness of making accounting changes to fulfill financial reporting objectives, Consisder relevant ethical issues in your response. A basic framework to address ethical decision-making is provided here: Ethical Decision-making Steps

Ethics Discussion in Accounting:

There are many frameworks for the analysis of ethical dilemmas in Accounting. The basic steps include:

1. Identify the facts--who, what, where, when, and how.

2. Identify the ethical issue and the stakeholders such as shareholders, creditors, management, employees, potential investors, and the community.

3. Identify the values relevant to the situation such as confidentiality verses the right to know.

4. Specify the alternative courses of action.

5. Identify a course of action and the consequences of that action.

Answer 1

Every decision taken in good faith is vaild decision so far no provison of applicable law gets voilated. The management has all the rights to change its policy time to time for betterment of the business.

The main objective of the business is to earn profit. If business is involving consistent losses then it will not substain in the market. It will also give adverse effect on the economy in every possible concerned aspect. Every business organisation have to take care of its shareholders too, as long they are invested in company , company will do better business. Finacial backing is very important for consistent growth. if company does not give resonable returnes to there existing stakeholder, after some time they start doing disinvestment. company have to consider each and every prospective which is relatable with business.

Here, we considering an business related to manufacturing of electric power transmission and distribution equipment who had given more than doubled its EPS by changing depreciation methods.

As per GAAP principles an business may opt any method of depreciation which he thinks deem fit. The said company have been following method 1(say) of deprecation earlier which leads to lower the existing profit earn by the company in an finacial year, which also effected the EPS of shareholders. Lower profits or negative profits is always bad for business as its defeating main object of the business and also effeting the ecomony. here the company management has only change the method of deprecation which leads to the increase of the profit avilabe to the shareholder.

eg. A company having 10,000 Equity share holders AND profit earned in an finacial year after all expences but before deprecation 1 lakh. deprecion as follows

method 1 (earlier)	50000
method 2 (new)	20000

computation of EPS

Particular	Method 1	method 2
net profit	100000	100000
less : dep	(50000)	(20000)
net profit avilabe for SH (a)	50000	80000
No. of equity share    (b)	10000	10000
EPS [a/b]	5	8

As per above example the profit of company was same only there is change in EPS.