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Comment by sebmellen | Hacker News Reader

Interesting accounting magic indeed. It seems like tricks like this make it remarkably easy to game stock price. Are there any controls on this?

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It's not accounting magic at all.

A $1000 server with a 4 year life span is expensed at $250 a year.

A $1000 server with a 6 year life span is expensed at $167 a year.

You convert your server lifespan from the former to the latter you get $83, or 33%, savings a year.

If you (intend to) keep your servers for 6 years and do not make this adjustment, then you're doing a false accounting, not the other way around.

The controls are that if 4 years from now they decide that the servers need replacing after all and take a write-down then shareholders have a very solid case to sue the company.

How does suing a company work? Is it functionally just like a forced dividend, or is it more complicated than that?

The latter. It is functionally closer to a speculative investment. Litigation is expensive and notoriously uncertain.

It's like any other class action lawsuit. Nothing to do with a dividend.

But if it's the stock holders that are suing the company, and they are receiving compensation from the lawsuit based on the size of their holdings, it's a cash payment from the company to the holders, which is exactly what a dividend is.

Not all stock holders will be part of the lawsuit, and some non stock holders (say people who have already sold) can be part of the lawsuit. There can also be people who claim second and third degree damages without actually holding any stock. And there is no rule that compensation has to be in proportion to anyone's holdings. All of this will be up to the court to decide.

That's very unlikely. In each case the change would be backed by an analysis which justified the change, nefarious intent would be pretty difficult to prove.

Is it not possible to go back in 4 years and explain in 4 years that the market is more competitive than expected?

No, because they're balanced over time. It's when you don't make the charges that this becomes stock manipulation.

Not writing down investments is how Enron committed it's mark-to-market fraud.

Not an accountant but I assume that standards such as GAAP and IFRS cover this?

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