Bensons Business Briefing Assume that you are a member of the management team of Benson Corporation, a small, relatively

young, privately-held manufacturing company. Recently, Bensons current twelve person ownership group decided that it would take the company public via an initial public offering (IPO), which will occur within the next few months. While Benson has never been profitable in its short history it has shown solid improvement over the last few years as evidenced by a net loss per share (or negative EPS) that has declined steadily over that time. Expectations are that this is the year Benson will finally report a positive earnings per share (EPS). In fact, managements forecasted positive earnings of 14 cents per share (EPS of $0.14) was critical to the timing of the IPO. The current stockholder group felt that the reporting of positive earnings was essential to maximizing the issuance price of Bensons IPO. Yesterday, the internal results of the most recent months activity had just been reported to Bensons management team. Unfortunately, these results were significantly below expectations and a successful month was crucial in achieving the targeted EPS of 14 cents. In an urgent meeting called by Bensons controller, Chris Rowe, it was reported that not only was it likely that the company would fail to meet earnings targets but it would miss by a sizable margin. Management had fully expected that the income statement that Benson would provide to potential investors of the IPO would reflect a positive EPS. Now, this seemed highly unlikely. Even the most optimistic forecasting scenario suggested that negative earnings of 28 cents per share was likely to result; an amount that was barely an improvement over the previous year. Chris Rowe wondered aloud about the significant negative impact of missing this years earnings target. Bensons turning the corner by reporting positive EPS was critical in maximizing the stock price to be achieved in the IPO. Reporting a negative EPS was bound to have a significant adverse impact on the IPO stock price. Even if management forecasted positive earnings for next year, it would likely have little impact given the disappointing results of the current year. In addition, Benson was committed to the upcoming IPO and delaying it for a year was not considered a feasible option. Internally, Bensons management often boasted that their financial statements and accounting reports were of the highest quality. For instance, Benson traditionally has been more conservative than its competitors when recording depreciation on its property, plant and equipment as evidenced by the selection of depreciable lives that are much shorter than its competitors. The dire tone of the meeting took a potentially positive turn when one of the staff accountants, Stephanie Dilon, raised the issue of a significant asset purchase made earlier in the year. Consistent with long standing company policy, the new machine was to be depreciated over ten (10) years even though management was fairly confident that the machine would last well beyond ten (10) years. Competitors typically depreciated similar assets from ten (10) to twenty (20) years.

Bensons shorter depreciable lives are conservative and result in greater depreciation expense and lower earnings than those reported by its competitors. This conservative reporting was often cited by Bensons CEO, Jerry Hinsley, in support of the companys critical attention to high quality earnings. However, the point was raised that if the depreciable life of the new machine was extended beyond ten years, it might improve Bensons current earnings situation, perhaps even enough to meet the current years earnings target. Chris Rowe mentioned that, while it would be a departure from company policy to extend the depreciable life of the machine beyond ten (10) years, it was certainly allowable under Generally Accepted Accounting Principles and was unlikely to raise concerns from the auditors. Rowe asked to recess the meeting so he could analyze the EPS impact of altering the depreciable life of the machine. A little over an hour later you receive an urgent e-mail from the Rowe, who has called another meeting for 2:30. The e-mail also contains the results of the controllers analysis (see the Controllers Analysis on the following page). During this second meeting, Rowe discussed the results of the controllers analysis. Indeed, extending the depreciable life of the machine to twenty (20) years would allow Benson to meet its targeted EPS of positive 14 cents per share. In addition, the analysis also confirms that by adhering to company policy and selecting a depreciable life of ten (10) years, the likely result will be an EPS of negative 28 cents per share. The worksheet also summarizes the impacts and potential consequences of selecting a depreciable life other than ten or twenty years. While a twenty (20) year life would be a stark departure from Bensons typically conservative accounting position, adopting such a useful life has some potentially positive consequences for Benson. Not only would it be more likely that the IPO is a resounding success but it could very well be so much so that Benson garners some press coverage by major business news networks and publications. Indeed, Chris Rowe was also mindful of the fact that there were isolated competitors that used depreciable lives in excess of 20 years when depreciating comparable assets. The assistant controller, Pat Stallard, then raised the question as to whether or not altering the depreciable life of the asset was fair to the new investors who would be participating in the IPO. Surely, their objective was to acquire Bensons stock for as low a price as possible; an objective that was in conflict with Bensons existing owners who wanted to stock to sell for as high a price as possible. She noted that the departure from a 10 year depreciable life would be inconsistent with how similar assets were recorded in prior years, making comparisons between current earnings per share with prior years earnings per share difficult. However, Stallard agreed that all of the alternatives discussed are allowable under accounting guidelines and not out of line with the choices made by Bensons competitors.

The meeting is about to adjourn when Chris Rowe now turns to you, as part of Bensons management team and asks the following question: What depreciable life do you believe should be selected for the machine? What are the ethical issues here? Use the ethics theories to determine the most ethical depreciation approach Benson could take.

Controllers Analysis
Depreciabl e life 10 years 11 years 12 years 13 years 14 years 15 years 16 years 17 years 18 years 19 years 20 years >20 years Significant departure from company's depreciation policy Very significant departure from company depreciation policy $ 0.14 >$ 0.14 Major departure from company's depreciation policy $ 0.09 $ 0.11 Departure from company's depreciation policy $ 0.03 $ 0.06 Moderate departure from company's depreciation policy $(0.04) $ 0.00 Slight departure from company's depreciation policy $(0.14) $(0.09)
Projected EPS

Summary of Expected Consequences Strict adherence to company's depreciation policy $(0.28) $(0.20)