James Wright is the chief financial officer (CFO) for The Butcher Block, a major steakhouse restaurant chain. As CFO, James has the final responsibility for all aspects of financial reporting. The company is publicly traded and followed closely by the investment community. James holds regular teleconference discussions with financial analysts; in the most recent teleconference, he indicated the company is emerging nicely from the economic recession. He told the analysts that The Butcher Block should post earnings per share (net income divided by the number of shares of common stock) of at least $1.25. The analysts now expect that amount.
A couple months later, James is examining the preliminary year-end numbers. He notices that earnings per share are coming in at $1.23, two cents per share under target. He also is aware that The Butcher Block has been depreciating most of its restaurant equipment conservatively over a five-year useful life. In some cases, the equipment is used by the company for 10 years or more. He proposes to change the estimated useful life for a subset of the equipment to a more reasonable useful life of seven, rather than five, years. By depreciating over a longer useful life, depreciation expense will be lower in the current year, increasing earnings per share for the year to $1.26. It looks like The Butcher Block is going to meet analyst expectations after all.
Do you think James Wright's proposal to more accurately reflect the true depreciable life of assets is ethical? What concerns might you have?