ABSTRACT: This assignment will provide you with a better understanding of the costs and benefits of management's use of judgment in financial reporting. First, you will look at the differences in depreciation policies among three firms in one industry (airlines). This provides an opportunity to examine why firms in the same industry might adopt different depreciation policies for similar assets. Then, you will read about Waste Management, a case in which managers manipulated depreciation estimates to manage earnings. Finally, you will be asked to evaluate a hypothetical proposal to require all firms owning similar assets to depreciate them over the same period.
Analyzing depreciation differences between three airlines and speculating about the reasons for those differences will give you an appreciation for how firms can reveal information through their accounting policies. The Waste Management case shows how firms can abuse the discretion that GAAP allows. Assessing a proposal to require uniform depreciation estimates will provide an opportunity to analyze the tradeoff between information value and prevention of earnings management.
