Sunshine Limited is a very huge departmental store and was conducting their business through the store. The accounting policy of charging depreciation was the straight line method of depreciation from the starting , that is since the company was formed they were using straight line depreciation. For the year ended 2015 it was noticed by the manager that the profits of the company will rise and rise in 2016 and 2017. With the rise the researchers also predicted and fortuned that the profits will be at its lowest in 2018 and 2019. The manager did not want to look at the financial statements in this way rather he wanted steadiness in the statements of accounts. He wanted to be consistent as Consistency will lead the shareholders built more trust on the company . After knowing all the facts he then went to the accountant and then discussed the matter with her. He said her to do something so that the financial statements can show consistency.. He is implementing so because he needs to maintain constancy which would be missing if he wouldn’t have instigated his idea as the incomes was getting dropped down in 2017 and 2018.Keeping the shareholders happy is a greatest asset to company in long run. He wanted to show lower profits in 2016 and 2017 and wanted to transfer profits to the years where there are less incomes. The accountant thought that this method is vague and is not satisfying. But she needed to listen to her manager as she thought she would lose her job in case she did not follow his advice. After lots of paper work and combination and permutation she thought she would change the depreciation method from straight line to sum of digits method. Whenever any policy is change proper notes and disclosure needs to give in the financials as to why the policy is changes, is the policy changed because of any future benefit to the company. The accountant thought that the reason given by the management is vague and she doesn’t want to disclose Ian the audit report or the financial statements. It would therefore create a very bad impression of the company and the management
Depreciation is the method by which the cost of the asset that is tangible is allocated over its useful life. For tax determinations, trades can deduct the price of the touchable assets they acquisition as expenses of the business; Infect, trades must denigrate these assets in accordance to the rule specified. It is not a cash transaction . While expenses of depreciation is chronicled on the income declaration of a commercial, its influence is usually recorded in a distinct account and revealed on the balance sheet as added depreciation under the head tangible assists, with respect to the principles of accounting. Methods of computing depreciation vary from organisation to organisation. It may vary amongst asset types within the same occupational and may vary for tax drives. The business adopts such methods that very minutely reflects the predictable pattern of consumption of the future financial assistances Depreciation is a method of allocation and should not be confused with valuation. Four conditions need to see while calculating the depreciation. Depreciation should always be charged when the asset is ready to use and not the asset installation date. In other words we can say that when it is in the site and condition necessary for it to be accomplished of functioning in the method intended by organisation. Any asset when held for sale can’t be depreciated. When there is no production then the depreciation charge can be zero. The suitable life of an asset is well-defined in terms of the asset’s anticipated utility to the entity. The beneficial life of the asset can be shorter to it economic life. We also know that the depreciation methods should be evaluated each year and any change should be accounted properly.
There are several methods of calculating depreciation
This is the most simplest form of calculating depreciation. It is calculated by taking the cost of the asset minus any scrap value divide by the useful life. The amount of depreciation will be the same throughout the useful life.
When using the double-declining-balance technique, the recover value is not considered in defining the annual devaluation, but the book value of the asset being demeaned is never carried below its salvage value, irrespective of the technique used.
The entity accepts the method that most prudently reflects the foreseeable pattern of ingesting of the future fiscal assistances incarnate in the investment in the asset Sum-of-the-years’-digits is an enhanced and a more quicker method for calculating an asset’s depreciation. This technique takes in to deliberation asset’s foreseeable life and it calculates up the all the digits of the life collected., So if the asset was predictable to last for three years, The digits would be obtained by adding: 3 + 2 + 1 to get a total of 6. It is considered as most fast tracked methods of depreciation as the depreciation will be more in the starting years as compared to the years after that.
Since the crux of the question is to lower down the profits in the starting years so the sum of digits way of depreciation is the best way as the depreciation in the starting years will be more than compared to later years. S profits will automatically be less in 2016 and 2017 than compared to 2018 and 2019. This was the idea of the accountant. Since it can be easily seen that it is not the ethical way to reduce the profits in the years where there are huge profits and transfer them to later years. Profits and incomes are period expenses and should be recognised when it is incurred and should not be shifted or transferred. It is an incorrect adjustment that will be made in the financials. The bookkeeper tend to change the devaluation method and was not inadequate to reveal in the financial statement which is unprincipled and not putative.
AASB 116 deals with property plant and Equipment
This Standard shall be practical in accounting for property, plant and equipment except when additional Standard needs or permits a dissimilar accounting action.
It does not apply to
Accounting standards in Australia ere originally developed by the specialised secretarial bodies, and were initiated under their codes of ethics.Ethically the comply with the provisions of AASB 116 and ethically a good corporate governance should be established.Corporate governance is the organization of rules performs and procedures by which a company is directed and controlled . Corporate governanceessentially includes complementary the interests of acompany’s many investors, such as stockholders, organization, patrons, suppliers, investors, administration and the public
We see that the cost of the asset that is the property plant equipment can only be recognised if
There is surety that the economic benefits will flow to the enterprise
Reliable measurement can be done of the asset.
If an item of possessions, plant and equipment is revalue, entire class of plant and equipment to which that asset goes shall be revalue. An important part of an item of property, plant and gear may have a convenient life and a method of depreciation that are the similar as the useful life and the method of depreciation of another momentous part belonging to the same item. Such fragments may be convened in influential the depreciation charge.
In this case considering the rule of AASB 16, the standard
commends provisions for heading, dimension at acknowledgment, dimension after gratitude, and DE credit of properties, plant and kit assets
The motive of the standard is to commend the secretarial deed for possessions, plant and equipment so that the monetary declaration users can distinguish indication about an entity’s conjecture in its property, plant and equipment including the variations in the speculation that has been done. The chief materials in secretarial for property, plant and equipment are the heading of the assets, the strength of their resounding quantities and the decrease charges with the damage loses or gains related to them. The technique of depreciation used shall repeat the project in which the advantage’s future financial welfares are probable to be used by the enterprise.
Any method of depreciation that is being applied to an asset should be checked periodically at intervals and also properly scrutiny should be done at the end of the reporting period. and any alteration in the ingesting of the welfares arising in the upcoming future , the method shall be changed to reproduce the transformed design. Such an modification will be considered for as a alteration in an bookkeeping approximation in reverence to provision with AASB 108.Many methods can be used to calculate depreciation. The business adopts such methods that very minutely reflects the predictable pattern of consumption of the future financial assistances
The shareholders will be intimidated by the consistent profits. They would invest in shares as they are seeing consistency in the firm. So it will be misleading to them. Thus it wil create a big impact and would be consdered as fraud.
Conclusion:
We see that the change in method of depreciation is no change in accounting policy but it’s a change in accounting estimate simultaneously change in the principle. Alteration in secretarial policy only occurs if rules of whichever praise, measurement or presentation of line item are change. Method of depreciation alteration can changes neither of these. Therefore, it is termed as accounting estimate. Change in approximation or estimation is preserved prospectively while the change in the accounting policy will change retrospectively. A alteration in accounting estimation affected by a transformation in accounting principleistobeappliedprospectively.
With the change there is a responsibility to disclose everything properly, proper notes needs to be given stating all the changes.
We see that the change in the depreciation method can be termed as change in the accounting estimate. Any change needs to disclosed and properly dealt in the profit and loss accounts and prospectively changed.
Two points were to be taken care of
We see that the change in accounting estimate will actually alter both asset and liabilities.
The accountant is incorrect in not revealing the appropriate revelations as she is accountable to disclose it rendering to the Standards of auditing
Reference:
Federal register (2017).AASB 116- Property plant and equipment. [online] Available at: https://www.legislation.gov.au/Details/F2005B00678 [Accessed 9th April. 2017].
Internet (2017)Sum of digits[online] Available at: https://interunet.com/sum-years%E2%80%99-digits-depreciation-advantages-disadvantages [Accessed 9th April. 2017].
Asset accounting (2017).AASB 116- Property plant and equipment. [online] Available at: https://www.sace.sa.edu.au/documents/652891/e3c3644b-109e-404a-af87-2a114bb6651e [Accessed 9th April. 2017].
Maxwell ,AB (2017).AASB 116- Property plant and equipment. [online] Available at: https://www.coalface.com.au/PDFs/AASB116.pdf [Accessed 9th April. 2017].
Factsheet (2017).AASB 116- Property plant and equipment. [online] Available at: https://www.johnwiley.com.au/highered/aas2e/content029/fact_sheets/AASB116_ch10.pdf [Accessed 9th April. 2017].
Compiled AASB (2017).AASB 116- Property plant and equipment. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf [Accessed 9th April. 2017].
Accounting explanation (2017).AASB 116- Sum of digits method. [online] Available at: https://www.accountingexplanation.com/sum_of_the_years_digits_method_of_depreciation.htm [Accessed 9th April. 2017].
Federal register (2017).AASB 116- [online] Available at: https://www.legislation.gov.au/Details/F2017C00296/Download [Accessed 9th April. 2017].
Accounting standard (2017).AASB 116- Sum of digits method. [online] Available at: https://www.dlsweb.rmit.edu.au/toolbox/balanceact/toolbox11_06/resources/html/legis_aasb116.htm [Accessed 9th April. 2017].
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