LianTang, HK Corporation's controller, is concerned that net income may be lower this year. He is afraid that upper-level management might recommend cost reductions by layiog off accounting staff, himself included. Tang knows that depreciation is a major expense for HK. The company currently uses the san1e method for financial reporting as it uses for tax purposes-that is, a declining-balance method- and he is thinking of changing to the straight-line method.
Tang does not want to draw attention to the increase in net income that would result from switching depreciation methods. He thinks, Why don't I just increase the estimated useful lives and the residual values of the property, plant, and equipment? They are only estimates anyway. This will decrease depreciation expense and increase income. I may be able to save my job and those of my staff." Tang called his professional accounting body's "Ethics Hotline" and reached the Ethical Accountant for advice.
Instructions
Discuss. Make sure that you, the Ethical Accountant providing advice to Tang, identify the objectives of depreciation, who the stakeholders are in this situation, what disclosures are required, whether any ethical issues are involved, and what Tang should do.