09 May WHY WOULD A SHORTER DEPRECIABLE LIFE IMPACT BOOK VALUE?
Question1:In the aftermath of the global financial crisis attention has significantly shifted to how banks and financial institutions manage risks. This increased attention on risk management practices at industry-wide and bank levels is justified on the basis of the economic costs that can be potentially imposed by bank and financial institution failures. Similarly corporate governance of banks and financial institutions has also taken centre-stage in many countries including Zambia. Discuss how poor risk management and corporate governance practices could impose risks and other negative externalities not only on the banks and financial institutions but also to depositors and the economy as a whole.Question2:For a company using straight line earnings will be higher (less depreciation). As for book value (or equity) it will be higher under a straight line method. As for depreciable life a shorter life will cause a lower book value. Why would a shorter depreciable life impact book value?Depreciation expense is calculated differently for tax purposes than for book purposes which tends to lead to deferred tax liabilities. US GAAP allows the uses of both the straight-line and the double-declining depreciation methods. Let’s assume we just establish a new manufacturing firm what methods you think we can chose the straight-line or the double-declining depreciation methods.
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