Executive Summary The role andperformance of an accountant have undergone a major change with the due passageof time. This is in direct tune with theinfluence of ethics, as well as governance. The role is not only in terms of governance rather spreads to changingdepreciation, stakeholders, etc. In this report, Sunshine Ltd, a largedepartment store is considered for the purpose of study that is following thestraight-line depreciation since the formation. Viewing the slowdown, the company decided to change the method ofdepreciation and the same has been done without any disclosure. The report initiates with an introduction ofSunshine Limited followed by the concept of ethics and governance.
In thissection, AASB 116 has been studied in an in-depth manner. The change in the method of depreciation isdiscussed where it is clearly evaluated that the change in the method ofdepreciation is not a violation, however, the concealment of the fact is aviolation of AASB 108. From thediscussion it is evident that the change in the policies must be highlightedproperly.? 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 SunshineLimited is a large departmental store which has been using Straight line methodof depreciation from the inception of the company. The accounting standard AASB116 – Property, Plant & Equipment has defined depreciation as thedistribution of the depreciable amount of a tangible fixed asset over itsentire 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 thefinancial statements of the company. Ethics and Governance The conceptof depreciation of tangible fixed assets has been defined and is governed bythe accounting standard namely AASB 116.
As per the requirements of this AASB 116, assets residual value andeffective useful life should be reviewed and reclassified at the end of theyear. In case, if the age of the asset or the depreciation amount changes, thenew depreciation must be accounted for to determine the correct value of theasset in the books of accounts. This policy is as per paragraph 32-38 of AASB108.
Any changes desired in the estimated life of the asset, ideally, in theinitial years, this will help to allocate correct life of the asset as per itsusage (Martinet. al, 2016). In case the asset is fullydepreciated, there should not be any adjustment to the useful life leftover. In case theorganization wants to change the depreciation method, AASB 116 prescribes thatthe change in the method should be retrospectively be adjusted and any gain orloss 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 inan accounting estimate like a change in useful life or residual value.
It isimportant to note that any change of policy done retrospectively or change inaccounting estimate done prospectively must be fully disclosed in the notes toaccounts to be given to stakeholders where the stakeholders may get an idea ofa change of policy or estimated and its effects on the profit figures (Merchant,2012). Hence, AASB 108 deals with all thedisclosure requirements a well. Every Assethas a useful life and a residual value which is estimated at the initial yearof the asset purchase. AASB 116 prescribes that this useful life and residual lifeshould be reviewed at the end of every accounting year which may or may notchange, but in both the cases, any change in the policy or estimate has to bedisclosed and adjusted. The disclosure should be such that the material effectof the change in the policy or estimate on the profits of the company is fullyexplained to the stakeholders.
Change in the method of depreciation byAccountant of Sunshine Ltd. SunshineLimited uses Straight Line Method of depreciation from the very starting of thecompany. For the year ended 30th June 2015, the company has made a remarkableprofit 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 somemore years to come. But the economists were predicting that there may be aneconomic slowdown till the year 2018 and 2019 and hence there might be adownfall in the profits of the company in the years to come especially 2018 and2019. The generalmanager of the company Kam Sunshine is of the view that if the profits of thecompany will go down in the years to come, it would leave a bad impression onthe stakeholders of the company. Hence, he has approached the accountant tofind a way out so that the high profits of the current year and the next twoyears are reduced in the financial statements so that when the slowdown comes,the company’s financial statements shall depict a consistent picture of thecompany’s profits. Theaccountant has found out a way to reduce the profits for the next two years sothat in further two years the company can display consistent profits in itsfinancial statements.
She has decided to change the method of depreciation fromStraight Line Method to the Sum of Years’ Digits Method. The reason behind thischange is that the amount of depreciation will increase using the latter methodin comparison to the former method that was being used (Kaplan, 2011). Thisincrease in depreciation amount will ultimately reduce the net profit of thecompany in the financial statements. The changeof method of depreciation has been done by the accountant only to save her jobcontract with the company in near future. There is no violation of accountingstandards in changing the depreciation method, but the accountant has notdisclosed the facts regarding this change in the notes to the financialstatements which is a violation of accounting standard AASB 108 (Nedles & Powers, 2013).
In the givencase study we analyze the procedure laid by the standard AASB 116 and AASB 108on how to change the depreciation policy or method and further disclose itseffect on the financial statements. The company is a big departmental storenamed sunshine limited that initially used to use straight-line depreciationmethod. The company was doing good business until the year ended 30th June2015. However, the global slowdown was expected to arrive soon after (Williams, 2012).
This does not mean that the company should manipulate itsbooks of accounts. The company instead of focusing on their business operationsfor continued increased profits has resorted to misrepresentation in the booksof accounts. They have changed the depreciation method from a straight line tothe sum of year’s method (Lapsley, 2012). This increased the depreciation in a way that book profitfor the company gets lowered in the years 2016 and 2017 and when actualslowdown hits the market in the year 2018 and 2019, where the financial figurestake a hit and the profits go down, the profits will be seen as going down fromcontinuously 3 to 4 years and will not catch the attention of manystakeholders. Effects on Stakeholders Thestakeholders are the true owners of the company as they have invested theirmoney in the company in an expectation of return on their investment andcapital appreciation. It is both lawfully required and need of the hour todisclose each and every fact and figures to the stakeholders.
Any manipulationsor window dressing to the books of accounts is a willful misrepresentation andfinancial fraud. The stakeholders have the right to be informed properly aboutthe workings of the company (Kacperczyk, 2009). The companies across the globe have a commitment to theregulators regarding the correct disclosure and presentation of the books ofaccounts.
Hence it is the responsibility of the management of the company to donot hide any fact and figures and prepare the books of accounts in the bestpossible correct manner (Kruger, 2015). Even if thefinancial figures are on a negative trend or there has been a dip in theprofits or sales in the financial statements. The company is under anobligation 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 guiltyof misrepresenting the books of accounts by the changing the accounting policyof depreciation in the books of accounts. They have not followed the guidelineslaid by AASB 108 & 116. They have also not disclosed the changes in thepolicy or any estimate in the notes to accounts (Kruger, 2015). This is a pureviolation of the guidelines laid the accounting standards. In case anystakeholders take a decision based on the false figures or believe in themisrepresentations and incur any short term or long term losses, the companyshall be fully responsible for the loss and shall make good the loss of thestakeholders. For example: In case an investor stays invested in the companyafter believing in the false figures of the company and after some time if theshare prices of the company fall drastically (Kacperczyk, 2009). The Investors who have believed inthe company and its working shall be entitled to get his losses recovered.
Themanagement and the accountant of Sunshine Ltd. Should not have used anymalpractices in the books of the accounts. The management has changed thepolicy of depreciation which will allow them to maintain their profits over thenext few years and will not distort their financial figures which will keepintact the investors and the stakeholders in the company (Melville,2013).
The general manager Kam should beaware of the effects and implication of AASB 116 which not only prescribes theprocedure of change in the policy of depreciation and also the requirements ofdisclosure in the books of accounts (Christensen, 2011). Hence, Kam’s approach is incorrect and also he is guiltyof misrepresentation in the books of accounts. On the otherhand, the accountant Maria who initially did not like the idea, eventually inthe pressure of losing her job agreed to change the depreciation method from astraight line to the sum of years’ digit method. She should not have agreed tothis change as an accountant and should have discussed the implication of AASB116 with his general manager (Christensen, 2011).
One more mistake which she did was not to disclose thechange of the policy of depreciation in the books of accounts as she felt thatthe manager’s reason to change the policy was not sustainable and would beeventually questioned by the stakeholders. So she suppressed the matter in thebooks of accounts (Meeks & Swann, 2009). ? Conclusion & Recommendations So in thelight of facts given above, there are mainly two problems or mistakes made bythe management of Sunshine Limited which are as follows:Firstly thegeneral manager did not follow the procedure laid down by AASB 116 in changingthe depreciation policy in the books of accounts. Secondly, non-disclosure ofthe same and its material effects in the notes to accounts.So, ouropinion in this regard is that in case any stakeholder who believes or has areason to believe in the financial statements of Sunshine Limited and incursany loss immediately or in the long run shall have to be made good by themanagement of the company which may be small or big.
The management shall repaythe loss to the stakeholders which are due to their misrepresentation in thebooks of accounts, for example- loss due to sudden fall in the share price ofthe company.