Executive highlighted properly. ? Contents Introduction. 4 Ethics and

 

 

Executive Summary

 

The role and
performance of an accountant have undergone a major change with the due passage
of time.  This is in direct tune with the
influence of ethics, as well as governance. 
The role is not only in terms of governance rather spreads to changing
depreciation, stakeholders, etc. In this report, Sunshine Ltd, a large
department store is considered for the purpose of study that is following the
straight-line depreciation since the formation. 
Viewing the slowdown, the company decided to change the method of
depreciation and the same has been done without any disclosure.  The report initiates with an introduction of
Sunshine Limited followed by the concept of ethics and governance. In this
section, AASB 116 has been studied in an in-depth manner.  The change in the method of depreciation is
discussed where it is clearly evaluated that the change in the method of
depreciation is not a violation, however, the concealment of the fact is a
violation of AASB 108.  From the
discussion it is evident that the change in the policies must be highlighted
properly.

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Contents
Introduction. 4
Ethics and Governance. 4
Change in the method of depreciation by Accountant of
Sunshine Ltd. 4
Effects on Stakeholders. 5
Conclusion & Recommendations. 7
References. 8
 

 

Introduction

 

Sunshine
Limited is a large departmental store which has been using Straight line method
of depreciation from the inception of the company. The accounting standard AASB
116 – Property, Plant & Equipment has defined depreciation as the
distribution of the depreciable amount of a tangible fixed asset over its
entire useful life.  As per AASB 108,
whenever a company changes the method of depreciation from its existing one,
then there must be respective adjustment and disclosure of the same in the
financial statements of the company.

 

Ethics and Governance

 

The concept
of depreciation of tangible fixed assets has been defined and is governed by
the accounting standard namely AASB 116. 
As per the requirements of this AASB 116, assets residual value and
effective useful life should be reviewed and reclassified at the end of the
year. In case, if the age of the asset or the depreciation amount changes, the
new depreciation must be accounted for to determine the correct value of the
asset in the books of accounts. This policy is as per paragraph 32-38 of AASB
108. Any changes desired in the estimated life of the asset, ideally, in the
initial years, this will help to allocate correct life of the asset as per its
usage (Martin
et. al, 2016). In case the asset is fully
depreciated, there should not be any adjustment to the useful life left
over. 

 

In case the
organization wants to change the depreciation method, AASB 116 prescribes that
the change in the method should be retrospectively be adjusted and any gain or
loss must be treated in accordance with the requirements laid down by AASB 108.
Further AASB 108 also prescribes prospective change where there is a change in
an accounting estimate like a change in useful life or residual value. It is
important to note that any change of policy done retrospectively or change in
accounting estimate done prospectively must be fully disclosed in the notes to
accounts to be given to stakeholders where the stakeholders may get an idea of
a change of policy or estimated and its effects on the profit figures (Merchant,
2012). Hence, AASB 108 deals with all the
disclosure requirements a well.

 

Every Asset
has a useful life and a residual value which is estimated at the initial year
of the asset purchase. AASB 116 prescribes that this useful life and residual life
should be reviewed at the end of every accounting year which may or may not
change, but in both the cases, any change in the policy or estimate has to be
disclosed and adjusted. The disclosure should be such that the material effect
of the change in the policy or estimate on the profits of the company is fully
explained to the stakeholders.

 

Change in the method of depreciation by
Accountant of Sunshine Ltd.

 

Sunshine
Limited uses Straight Line Method of depreciation from the very starting of the
company. For the year ended 30th June 2015, the company has made a remarkable
profit which was more than the usual profits made by the company every year.
The company was expecting for these high rated profits to continue for some
more years to come. But the economists were predicting that there may be an
economic slowdown till the year 2018 and 2019 and hence there might be a
downfall in the profits of the company in the years to come especially 2018 and
2019.

 

The general
manager of the company Kam Sunshine is of the view that if the profits of the
company will go down in the years to come, it would leave a bad impression on
the stakeholders of the company. Hence, he has approached the accountant to
find a way out so that the high profits of the current year and the next two
years are reduced in the financial statements so that when the slowdown comes,
the company’s financial statements shall depict a consistent picture of the
company’s profits. 

 

The
accountant has found out a way to reduce the profits for the next two years so
that in further two years the company can display consistent profits in its
financial statements. She has decided to change the method of depreciation from
Straight Line Method to the Sum of Years’ Digits Method. The reason behind this
change is that the amount of depreciation will increase using the latter method
in comparison to the former method that was being used (Kaplan, 2011). This
increase in depreciation amount will ultimately reduce the net profit of the
company in the financial statements.

 

The change
of method of depreciation has been done by the accountant only to save her job
contract with the company in near future. There is no violation of accounting
standards in changing the depreciation method, but the accountant has not
disclosed the facts regarding this change in the notes to the financial
statements which is a violation of accounting standard AASB 108 (Nedles & Powers, 2013).

 

In the given
case study we analyze the procedure laid by the standard AASB 116 and AASB 108
on how to change the depreciation policy or method and further disclose its
effect on the financial statements. The company is a big departmental store
named sunshine limited that initially used to use straight-line depreciation
method. The company was doing good business until the year ended 30th June
2015. However, the global slowdown was expected to arrive soon after (Williams, 2012). This does not mean that the company should manipulate its
books of accounts. The company instead of focusing on their business operations
for continued increased profits has resorted to misrepresentation in the books
of accounts. They have changed the depreciation method from a straight line to
the sum of year’s method (Lapsley, 2012). This increased the depreciation in a way that book profit
for the company gets lowered in the years 2016 and 2017 and when actual
slowdown hits the market in the year 2018 and 2019, where the financial figures
take a hit and the profits go down, the profits will be seen as going down from
continuously 3 to 4 years and will not catch the attention of many
stakeholders.

 

Effects on Stakeholders 

 

The
stakeholders are the true owners of the company as they have invested their
money in the company in an expectation of return on their investment and
capital appreciation. It is both lawfully required and need of the hour to
disclose each and every fact and figures to the stakeholders. Any manipulations
or window dressing to the books of accounts is a willful misrepresentation and
financial fraud. The stakeholders have the right to be informed properly about
the workings of the company (Kacperczyk, 2009). The companies across the globe have a commitment to the
regulators regarding the correct disclosure and presentation of the books of
accounts. Hence it is the responsibility of the management of the company to do
not hide any fact and figures and prepare the books of accounts in the best
possible correct manner (Kruger, 2015).

 

Even if the
financial figures are on a negative trend or there has been a dip in the
profits or sales in the financial statements. The company is under an
obligation to fully disclose the matter and the reasons behind the downfall.
Every investor or stakeholder should be fully informed (Spiceland et. al, 2011).
In the immediate case given above, the management and the accountant are guilty
of misrepresenting the books of accounts by the changing the accounting policy
of depreciation in the books of accounts. They have not followed the guidelines
laid by AASB 108 & 116. They have also not disclosed the changes in the
policy or any estimate in the notes to accounts (Kruger, 2015). This is a pure
violation of the guidelines laid the accounting standards. In case any
stakeholders take a decision based on the false figures or believe in the
misrepresentations and incur any short term or long term losses, the company
shall be fully responsible for the loss and shall make good the loss of the
stakeholders. For example: In case an investor stays invested in the company
after believing in the false figures of the company and after some time if the
share prices of the company fall drastically (Kacperczyk, 2009). The Investors who have believed in
the company and its working shall be entitled to get his losses recovered.

 

The
management and the accountant of Sunshine Ltd. Should not have used any
malpractices in the books of the accounts. The management has changed the
policy of depreciation which will allow them to maintain their profits over the
next few years and will not distort their financial figures which will keep
intact the investors and the stakeholders in the company (Melville,
2013). The general manager Kam should be
aware of the effects and implication of AASB 116 which not only prescribes the
procedure of change in the policy of depreciation and also the requirements of
disclosure in the books of accounts (Christensen, 2011). Hence, Kam’s approach is incorrect and also he is guilty
of misrepresentation in the books of accounts.

 

On the other
hand, the accountant Maria who initially did not like the idea, eventually in
the pressure of losing her job agreed to change the depreciation method from a
straight line to the sum of years’ digit method. She should not have agreed to
this change as an accountant and should have discussed the implication of AASB
116 with his general manager (Christensen, 2011). One more mistake which she did was not to disclose the
change of the policy of depreciation in the books of accounts as she felt that
the manager’s reason to change the policy was not sustainable and would be
eventually questioned by the stakeholders. So she suppressed the matter in the
books of accounts (Meeks & Swann, 2009).

 

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Conclusion & Recommendations

 

So in the
light of facts given above, there are mainly two problems or mistakes made by
the management of Sunshine Limited which are as follows:

Firstly the
general manager did not follow the procedure laid down by AASB 116 in changing
the depreciation policy in the books of accounts. Secondly, non-disclosure of
the same and its material effects in the notes to accounts.

So, our
opinion in this regard is that in case any stakeholder who believes or has a
reason to believe in the financial statements of Sunshine Limited and incurs
any loss immediately or in the long run shall have to be made good by the
management of the company which may be small or big. The management shall repay
the loss to the stakeholders which are due to their misrepresentation in the
books of accounts, for example- loss due to sudden fall in the share price of
the company.