(This is based on an actual case): A ‘particularly aggressive’ DVD rental store chain amended its depreciation charges for DVDs by extending their useful lives from 12 months to 48 months. This had the effect of adding $5 million to the company’s profits, an increase of nearly 20% for the year! On publication of a report critical of this practice, the share price for the company fell dramatically.

Critically examine the company’s depreciation policy, and comment on the likely effects on shareholders, managers and customers of the consequences of the adverse report. Can the company justify its actions?