The paper "Changing the Depreciation Method by Large Mart " is an outstanding example of a finance and accounting assignment. Depreciation refers to value loss of an asset. It is not to be regarded as a cash expense and it is added back when preparing a cash flow statement and since it devalues assets, it is used to decrease the earnings of an organization (Fraumeni and Barbara, 1997). Mostly used depreciation methods are the reducing balance and the sum of the digits method. There is also the straight-line method which spreads the depreciable balance evenly over the useful life of the asset (Jackson, 2008).
Reasons for an organization to change its depreciation method would be; if there is a newly acquired asset, if the organization wants to change the method for all assets or if the company wants to change the depreciable value of an asset (Jackson, 2008). In this case, Large Mart intends to completely change the depreciation method and these calls for a change in both the financial statements and the ratios (Fraumeni and Barbara, 1997). The change in the depreciation method is an accounting estimate change but not a change in the company’ s policy.
However, the change in the depreciation should be in agreement with IAS 16 which requires that the method of depreciation in use should reflect a pattern such that economic benefits in the future should be consumed as per the company’ s expectations. According to IAS 8.34, accounting estimate change is effected prospectively but not retrospectively. This is because no error has been discovered that should be corrected in the previous periods. However, the carrying amount will be affected by the new method.
According to IAS 8.36, the change in the depreciation is to be included as a profit or a loss. However, IAS 8.37 guides that if the change in an accounting estimate results to changes in assets and liabilities, or an equity item is related to it, then its recognition should be by the adjustment of the carrying amount of the affected asset, equity item or the liability in the change period (FASB, 2005). In the financial statement, there should be a disclosure of the amount and nature of the accounting estimate change in the current accounting period or if the change is expected to have an effect in the future periods.
IAS 8.39-40 states that if estimating is impracticable and the amount is not disclosed in the future periods, then that fact should be disclosed. The intention Large Mart CFO of changing the depreciation method does not influence my prior response because it is allowed as stated in IAS 8.34, that accounting estimate change is affected by the current circumstances that an organization may be facing or if there is emergent of new information.
It does not, therefore, relate to previous periods and neither is it a correction of an error (Stansberry and Gary, 2005). Question 2 According to IAS 38.54, development costs are only capitalized if the technicality and its feasibility commercially of the asset is established. The intangible asset must, therefore, have the potentiality of generating future economic benefits (FASB, 2005). The CFO of Large Mart should be in a position to distinguish between the research phase of a project and the development phase because if he is unable to do so, he should, therefore, expense the costs of the project as research costs.
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Financial Accounting Standards Board (FASB). (2005). Accounting Terminology Bulletin 1.
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Hulten., Charles R., and Frank C. Wykoff. (1996). Issues in the Measurement of Economic
Depreciation: Introductory Remarks. Economic Inquiry 34 No 1: 10-23.
Jackson, S. (2008). The Effect of Firms' Depreciation Method Choice on Managers' Capital
Investment Decisions. Accounting Review, 83(2), 351-376.
Stansberry and Gary. (2005). The Do’s & Don’ts of Depreciation. Rental Equipment Register. 1
June 2004. 28