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CFA Level I · CFA Level I Exam · Financial Reporting Quality

A company extends the estimated useful life of its equipment from 8 years to 12 years, with no change in actual asset usage. Relative to the prior estimate, the change will most likely result in:

Lengthening the useful life lowers annual depreciation expense and raises current-period earnings. The depreciable amount is spread over more years, and the change is applied prospectively. With no change in actual usage, this is a potential earnings management signal for analysts.

  1. Alower depreciation expense and higher current-period earningsCorrect
  2. Bhigher depreciation expense and lower current-period earnings
  3. Cunchanged depreciation expense because it is a change in estimate

Explanation

A longer useful life spreads depreciable cost over more years, lowering annual depreciation and raising current earnings. Changes in estimates are applied prospectively, but they still alter current-period expense. The option claiming no change misreads prospective treatment.

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