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Focusing on earnings management in this class, but let’s include some intuition from the conservatism topic we discussed in the last class.  Both are potential sources of bias in financial reporting, and worth our attention because they are related.  
1) Circle back to the Basu paper and the example that he used.  See the next page for the relevant information from the paper. a. How did Basu account for each respective change in the useful life of the asset, based on his description and the graph?  If it helps, make journal entries, use T-accounts, or use whatever tools you like to address this question. b. Now, go to the FASB Codification and find the guidance on how we treat a change in the useful life of a depreciable asset for financial reporting purposes.  These treatments are the same as was the case when Basu wrote the paper (and international standards use the same treatments).  How does the FASB say a company should treat these changes?  Again, make journal entries, use T-accounts, or whatever tools you like to illustrate your understanding of the treatment. c. Compare your results in (a) and (b) by: i. Showing on the graphs on the next page what the FASB’s treatment look like over time for both increases and decreases in useful life; and ii. Discuss your findings on how they are the same and different from Basu’s assumed treatments.  Are the FASB’s treatments consistent with conservatism?  
2) Say that you are a market participant (investor or potential investor) and you learn that a company’s significant productive assets have useful lives significantly shorter or longer than management had previously expected/predicted, as evidenced in its depreciation/amortization expenses over time. a. How would this news change your assessment of the company as a potential investment?  Explain your answer fully. b. Which treatment, Basu’s treatment or the current GAAP treatment, provides a more faithful representation of the impact of this event on the company in its financial statements?  Explain your answer fully.  (HINT:  Keep in mind the respective roles of accounting depreciation and impairment losses in financial reporting in your answer – i.e., what purposes do accounting depreciation and impairment losses respectively serve?) c. What role does conservatism play in your answer – is the more conservative treatment the more representative treatment, or does its bias cause its treatment to be less representative?  Explain fully.  
3) Both depreciation and impairment accounting involve management judgment in their respective applications to company asset and expense/loss reporting over time. a. In what ways can management potentially use its discretion in the process of measuring depreciation expense and impairment losses?  Can management “undo” the effects of conservative treatments in applying its judgment? b. Is management’s ability to use its discretion in this case a good or a bad thing, or both?  Why do you believe so

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