Mildmay Ltd. (Mildmay) is a public company that manufactures machine parts. In its most recent financial state ments, Mildmay wrote down $175,000,000 of its assets, which it will continue to use. The new president and CEO of Mildmay announced that the writedowns were the result of competitive pressures and the poor performance of the company in the last year. They were reported separately in Mildmay's income statement as required by IFRS and the notes said that the circumstances giving rise to the writedown were unusual and not expected to recur. Mildmay doesn't include the writeoff in its calculation of operating income.

Mildmay's summarized income statement for the year ended December 31, 2017 is (amounts in millions of dollars):

The writedowns will reduce the depreciation expense by $16,500,000 per year for each of the next eight years. After the announcement and release of the income statement, analysts revised their forecasts of earnings for the next three years to

Year ended December 31, 2018 ………………………….       $11,000,000

December 31, 2019………………………………………………        35,000,000

December 31, 2020……………………………………………..         71,000,000

Required:

a. What would net income be in each of 2017 through 2020 had Mildmay not written off the assets and continued to depreciate them? Assume that the operations of Mildmay don't change regardless of the accounting method used.

b. Why do you think the new management might have made the decision to write off the assets?

c. As an investor trying to evaluate the performance and predict future profitability, what problems do asset writedowns of this type create for you? Consider how the writeoff is reflected in the income statement and use the Mildmay case as a basis for your discussion.

Transcribed Image Text:

Revenue $ 625 Operating expenses: Cost of goods sold Depreciation Selling, general, and administrative costs $470 87 82 639 Operating income Other expenses: (14) Non-recurring item 175 Interest expense 33 Income tax expense (53) 155 Net income ($169)