Financial Discussion
Different companies use different depreciation methods to determine the useful/functional lives of their assets, such as property, equipment, and plant (Del Giudice, Manganelli & De Paola, P. (2016). In this case, we look at the 10-k report of TL Company to determine the useful lives and depreciation techniques of their assets and compare them with those of EarthWear Clothiers. The 10-k filling and the annual reports from TL Company were analyzed. The firm falls under the retail catalogue type of company with separate distributors as well as franchises globally and deals with accessories, footwear, mostly for children and women, and premium quality appraisals. The company adheres to the policy of depreciation of assets within the approximated functional lifespan of the asset or during the term of leased assets. The approximated practical life expected for the building is between three to twenty years. For equipment as well as machinery it is between three to twelve years.
EarthWear Clothiers, however, take into consideration the useful life of their building as between ten to thirty years, and for their fixtures, furniture, and equipment as between five and ten years. For the two companies, the depreciating policy appears to be different with respect to the approximated functional life of various classifications of company assets. Therefore, it the auditor’s obligation to make comparisons on the depreciation policies of firms that belong to the same sector and demonstrate the legitimacy of each system put in place by their clients. In this specific condition, the Earth Clothiers’ auditors could consult with the company’s management to understand why they chose a higher useful life of their buildings when compared to TL Company since this may result in inflation of profits.
Reference
Del Giudice, V., Manganelli, B., & De Paola, P. (2016, July). Depreciation methods for the firm’s assets. In International Conference on Computational Science and Its Applications (pp. 214-227). Springer, Cham.