More on Depreciation Adjustments
Last month we had a post in these pages about how Amazon ($AMZN) recently shortened the estimated useful lifespan of the computer servers it uses , which will have the practical effect of reducing operating income this year by some $700 million. Now Bloomberg has pulled on that thread more strongly, with an in-depth look at how companies adjust the useful lifespan of assets they use . It turns out that numerous companies do this — sometimes extending the estimated lifespan, which can push net income up; and sometimes shortening the estimated lifespan, which pushes net income down. The key issue here is that as you shorten estimated lifespan, your annual depreciation charges increase; that’s what whittles down net income. The same principle runs in reverse, too: extending estimated lifespan spreads out depreciation across more years, so your annual depreciation is lower; that pushes net income up. Cynics will suspect that adjustments to estimated lifespan are simply a form of earn...