The interim report for the fourth quarter of 2009 for Norbord Inc. included the following information:
Note 2. Changes in Accounting Policies and Significant Accounting Estimates
Property, Plant, and Equipment
. . . The Company had utilized the straight line method of depreciation for production equipment, which allocates cost equally to each period. In a period of fluctuating production levels, the straight line depreciation method does not result in rational allocation of the cost of equipment to production. Consequently, effective March 29, 2009, the Company changed to the unit of production depreciation method for its production assets. This method allocates the equipment costs to the actual units produced based on estimated annual capacity over the remaining useful life of the assets. The impact of this change has been applied prospectively as a change in an estimate, and it resulted in a $ 12 million reduction in depreciation expense in 2009.
Required:
1. What was the stated reason for the change in depreciation method? What other factors do you think management considered when it decided to make this accounting change?
2. Do you think this is an ethical decision?
3. Who were affected by the change, and how were they benefited or harmed?
4. What impact did this change have on cash flows for Norbord?
5. As an investor, how would you react to the fact that Norbord’s depreciation expense will decrease by $ 12 million?