[Anonymous]

Hey everyone. I am posting this in the FAR review section because I thought someone who is currently studying may have the answer. Is there any authoritative guidance for determining the useful life of a fixed asset for calculating book depreciation? I know there is for Tax depreciation, but I can’t find anything for book depreciation. Is it an estimate by management? I am doing a presentation for a course about different earnings management techniques, and whether or not they are acceptable or unacceptable under GAAP. I also have a section for gray areas that could be acceptable under GAAP, but have ethical issues. I was thinking that the estimation of useful life may have potential ethical issues if done improperly, but might be okay under GAAP.

Thoughts? Authoritative guidance?

[Mayo]

It's an estimate by management based on available information. From what I understand there is some guidance published by the AICPA that gives rough guidelines for generic categories like buildings, cars, trucks, etc. At the end of the day it's up to management's discretion, but they have to be able to back it with some type support.

In terms of assets, anything that is new or unique could be difficult to say hat the useful life would be. For example, if you were an accountant and a private company wanted to build a space station. What useful life would you use? Mir? Projections based on current research? Management could increase or decrease the useful life for a few years and claim there was a solar flare that could call into question the viability of the asset. The next year they could say, “Hey it's all good. We're not worried anymore because the solar flares are abating. Useful life is back to a zillion years”. If they're the only ones with a space station of their kind, who's to say they're not estimating useful life correctly?

That's off the top of my head. Either way, you should check out the “Financial Numbers Game” for a good background on earnings management.

Mayo, BBA, Macc

[Mayo]

It's an estimate by management based on available information. From what I understand there is some guidance published by the AICPA that gives rough guidelines for generic categories like buildings, cars, trucks, etc. At the end of the day it's up to management's discretion, but they have to be able to back it with some type support.

In terms of assets, anything that is new or unique could be difficult to say hat the useful life would be. For example, if you were an accountant and a private company wanted to build a space station. What useful life would you use? Mir? Projections based on current research? Management could increase or decrease the useful life for a few years and claim there was a solar flare that could call into question the viability of the asset. The next year they could say, “Hey it's all good. We're not worried anymore because the solar flares are abating. Useful life is back to a zillion years”. If they're the only ones with a space station of their kind, who's to say they're not estimating useful life correctly?

That's off the top of my head. Either way, you should check out the “Financial Numbers Game” for a good background on earnings management.

Mayo, BBA, Macc

[Mayo]

here's the guide i was talking about:

https://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/Accounting/FinancialReporting/PRDOVR~PC-WI09210X/PC-WI09210X.jsp

Mayo, BBA, Macc

[Mayo]

here's the guide i was talking about:

https://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/Accounting/FinancialReporting/PRDOVR~PC-WI09210X/PC-WI09210X.jsp

Mayo, BBA, Macc

[Anonymous]

Thanks! Could you, or anyone else, provide where in the ASC it says management may or may not use judgement when estimating useful life?

[Anonymous]

Thanks! Could you, or anyone else, provide where in the ASC it says management may or may not use judgement when estimating useful life?

[Mayo]

ASC 360-10-35-4, which is based on ARB No. 33 back in 1947

Mayo, BBA, Macc

[Mayo]

ASC 360-10-35-4, which is based on ARB No. 33 back in 1947

Mayo, BBA, Macc

[Mayo]

“Estimates of the probable useful life of a facility by those best informed in the matter may indicate either a shorter or a longer life than the statutory 60-month period over which the certified portion of its cost is deductible for income-tax purposes.”

…by those best informed in the matter… In other words, if you have a building, there's probably a standard rate. But if you just created a unique whatchamacallit then the one who creates it probably has the best idea of how long or short the useful life is.

Mayo, BBA, Macc

[Mayo]

“Estimates of the probable useful life of a facility by those best informed in the matter may indicate either a shorter or a longer life than the statutory 60-month period over which the certified portion of its cost is deductible for income-tax purposes.”

…by those best informed in the matter… In other words, if you have a building, there's probably a standard rate. But if you just created a unique whatchamacallit then the one who creates it probably has the best idea of how long or short the useful life is.

Mayo, BBA, Macc

[Author]

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