Depreciation at Delta Air Lines
Autor: goude2017 • January 6, 2018 • 811 Words (4 Pages) • 832 Views
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Depreciation should be split into two parts in 2007. For the first 4 months, the amount of depreciation should be based on original assets value. For the next 8 months, depreciation should be based on new fair value, new life span, new residual value.
Question 5.
The concept of “fresh start” accounting can be a beneficial policy for the company but also should be allowed under strict and appropriate conditions.
One of the pros of this “fresh start” is that the companies can re-value its assets to meet their current and realistic conditions which can reflect the true situation of the company. The price and value of the assets can decline/incline throughout the years. It is the same regarding the depreciations, because the equipment that the company initially anticipated a certain residual value and useful life can change as time passes.
In contrast, the companies might want to change their accounting policies so that they can make their financial statement look better and reduce the amount paid out for depreciation in order to maximize their income.
Another reason why the companies might misuse this accounting changes is tax issues. They might want to reduce the depreciation costs so that they would pay less tax. The taxed are roughly calculated upon their EBIT and tax rates, and if depreciation reduces, the amount of tax they actually pay will be less.
Another reason why the companies might misuse this accounting changes is tax issues. They might want to increase depreciation costs by increasing value of assets without reasonable investment. If the value of the asset is increased without any further expenditure (real expenditure such as replacing new engines for airplanes), depreciation costs will also be increased and net income will be reduced, so that they would pay less tax. The taxed are roughly calculated upon their EBIT and tax rates, and if depreciation cost increases without real flow of cash, the amount of tax they actually pay will be less. Therefore, increased asset values should also be calculated as gains for tax purposes.
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