Problem in Expense recognition

[TomHealey]

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[TomHealey]

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[Tartaglia]

Yes, we agree on that, the reason we (re)started this whole discussion is because you claimed in your first statement that DDB is more more aggresive that STL, which is not correct.

@TomHealey

My view is - SL is considered to be more conservative, while DDB and other like maybe “sum-of-the-months” are considered to be aggressive. SL is conservative because once used, it will not “pump up” earnings in near periods (ceteris paribus), to the contrary DDB will show in near periods higher NI (ceteris paribus). To “pump up” earnings you can also play with residual values (this will affect depreciatioin accrual), or periodic depreciation charges.

The effect of changing the life span is clear. But for a given life span (that is, same life span for both methods), DDB is more conservative than STL.

[TomHealey]

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[S2000magician]

@Tartaglia

I agree with you Mustafa.

@S2000magician

Straight-line depreciation is more conservative, accelerated depreciation is more aggressive.

Assuming rising costs, FIFO is more aggressive, LIFO is more conservative.

And so on.

SLD is more aggressive while accelerated is more conservative (you are recognizing more expense earlier compared to SLD, resulting in lower Net Income in earlier years, and higher Net Income later on)

Good catch. Not sure how I botched that one so terribly.

I’ll go amend my earlier post.

[S2000magician]

@TomHealey

I disagree again.

You shouldn’t.

He’s correct.

Straight-line depreciation is more aggressive than accelerated depreciation.

(I checked that sentence fifteen times to make sure that I didn’t repeat my earlier blunder. I didn’t.)

[Tartaglia]

@TomHealey

So, to sum up:

1. DDB is conservative when asset is aquired.
2. DDB less conservative and more aggresive later years, as it allows NI to increase.
3. SL is more aggressive when asset is aquired.
4. SL is less aggressive and more conservative in later years, as it doesn’t change, if other things equal, NI will not be affected y-t-y by depreciation policy.
5. During the lifespan, company can further manipulate depreciation to achieve desired results.

Ok, this my last post on this one, then someone else can take over:

Aggressive vs conservative is judged on from today’s perspective (it is not the dynamic average of what happens over the life span), otherwise we can never make a statement either way.

I will argue that SL is more aggressive because NI is higher today compared to DDB. Then you will argue, but it reverses in the future so then DDB becomes more aggressive. No that is not correct.

We are evaluating everything from TODAY or period t=0.If you have a method that results in a higher Net income this period and lower income in future period, that is called aggressive accounting (which is the case for DDB).

[Tartaglia]

Thanks S2000, it was starting to get old.