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A company has been depreciating its IT equipment over 5 years, but now finds that it is becoming obsolete in 3 years.
What does the consistency principle permit the company to do?
A change the depreciation policy to 3 years and highlight the effect of this in its financial statements
B change the depreciation policy to 3 years without indicating the effect on profits
C continue to depreciate over 5 years as per the existing policy
D continue to depreciate over 5 years but note that after 3 years the equipment will be obsolete
Please don’t set us test questions to answer – you must have an answer in the same book in which you found the question, and you should ask what problem you have with the answer. Then we will try and help you.
Yes ur right sir, but it doesn’t explain well, and I find it hard to understand.
The question is not actually a very good one anyway because it is not really the consistency principle (that is that if you are using (for example) straight line depreciation then you should continue to use straight line, to be consistent).
If decide that the expected life has changed, then they should calculate the depreciation based on the new remaining life (and if material) make a note stating the effect of the change.
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