A company owns two hotels, both in large cities. Revenues for the two hotels are similar. However, one building is about two years old, and the other was built ten years ago. For each hotel’s manager, a portion of annual compensation is based on return on assets above a guideline set by the company for all hotels in the chain. After carefully studying the financial information available to her, the manager of the new hotel decides that she is at a disadvantage because of the new building, and decides to compensate by recalculating depreciation for the building using an accelerated method.
Why does the new building put this manager at a disadvantage relative to her compensation?
Can depreciation be calculated differently for reporting and managerial evaluation? Why or why not?
What problem would this decision present for the company as a whole?
Do you think that a company has any flexibility in how it calculates return on assets (or any ratio, for that matter) for internal use?
What would you, as the company officer who supervises both managers, suggest as a solution to this problem?
