Concept Ltd. is a listed public company. It is in a volatile industry. The market price of its shares is highly sensitive to its earnings. The company’s annual meeting is to be held soon and the president is concerned, expecting to be attacked strongly by a dissident group of shareholders.
One issue the dissidents are expected to focus on is the company’s amortization policy. They will claim that the annual declining balance amortization charges are excessive that the company’s conservative amortization policy seriously understates annual earnings per share, causing the shares’ market price to be artificially low. Threats have even been made of suing management and the board of directors to “recover the resulting loss in market value, relative to shareholders in companies with less conservative amortization policies, suffered by Concept’s shareholders.”
The president has asked you to help prepare a defense against the expected attack on the company’s amortization policy.
Write a memo summarizing how you would recommend the president respond to this attack.