Any changes in the method of accounting needs to be disclosed in the books of accounts of the company and if company violates the disclosure requirements the company will be penalised for violating the rule and by laws of the company (Bragg 2010). Accounting policy changes disclosure is a crucial thing for the investors and stakeholders’ of the company as this helps them to check the stability and financial position of the company. The changes in the policy of the company are disclosed in the disclosure requirements by the company as companies need to mention all the changes in their accounting policies they have made in the same financial year (Tzovas, 2005).
In this case as Sunshine Ltd has changed its method of charging depreciation from straight line to sum-of-years-of-digits method, the manager wants the company’s financial information to show a constant move in the profit for coming financial years. Sunshine Ltd was making huge profits from last two financial years and the manager wants to maintain the same for coming years. The problem here is that economists predicted a slowdown in the economy in the coming years and that will affect the company’s profit and it will decline in the coming years. The manager of the company asked for some suggestions from the accountant so that the financial statements will present a comparative analysis with last years and will give a positive impact on shareholders’
The accountant of the company hands all the relevant information regarding the financial statements of the company. All the accounts are maintained by the accountant and he/ she will be the person who is responsible to select the methods of accounting which are most beneficial for the company. A true and fair view of company’s financial statement is ensured by the accountant of the company and if any discrepancy is found in the financial statements the accountant will be held liable for the same. Any changes in the method of accounting are reported by the accountants of the company and they are responsible for taking the decisions which are in the interest of the company. The changes in the accounting policy needs disclosure which is to be done in the notes to accounts of the company so that shareholders will get a knowledge about the changes in the company’s accounting.
In this case as the company changed its method of charging depreciation from Straight line to Sum-of-years-of-digits method and the accountant and manager has no valid reason to make this change as the change is just for the sake of presenting a good view in the eyes of stakeholders’. This actually comes under unfair practices as this will manipulate the mind of the stakeholders’. The company has whole right to change the method of depreciation but that too as per the laws and regulations of the guiding body of the company. The company can change the methods of accounting if that change will give future benefit to the company, here the change will give future benefit to the company but the change will result in violation of the laws which will impose fines and penalties on the company and the accountant and the manger as well. The company’s goodwill will get affected by this which is not at all good for the growth of the company.
The accounting standard for Property, Plant and Equipment that is AASB116 is an Australian Accounting Standard that describes the methods of valuation of fixed assets. The methods for charging depreciation are also governed by AASB116. Any changes in the methods of charging depreciation are to be done in accordance with AASB116. The method for charging depreciation and the rate of depreciation needs to be disclosed in the company’s books of accounts (Tsamis & Liapis, 2014). The carrying amount of property, plant and equipment also consider the change in method of charging depreciation.
In this case the company changed the method of charging depreciation but failed to comply with AASB116 requirements. The reason to change the method of accounting is not valid and has no relevance as per this guiding standard as this is about manipulating company’s data. It is obligatory for every company to comply with the AASB116 requirements, if company do not follow the AASB116 then fines and penalties will be imposed on the company. The company did not disclose the material information regarding the change in method of charging depreciation in the books of accounts of the company which is against the guidelines and principles of AASB116.
The changes in accounting policy will retrospectively effect the financial statements of the company as the profit figures needs to be revised and the effect of change is to be given in the profit and loss account of the preceding financial years (Ashbaugh & Pincus, 2001). The difference in the depreciation between these two methods namely Straight line and Sum-of-years-of-digit method will either be added back in the profit or excessive depreciation will be deducted from the profit of previous financial years (Gabriel, 2010). It is necessary to give retrospective effect on the financial statements so that the financial statements can be compared easily else it will not be possible to compare the information as the basis will not be same (Kiesko, Weygandt & Warfield, 2010).
In the present case the company wants to change the method of charging depreciation from Straight line to Sum-of-years-of-digits method they need to give retrospective effect of this change on the company’s financial statements. If the difference between Straight line method and Sum-of-years-of-digits method is positive then the profit will be reduced by that amount and if the difference is negative that will be added back to the profit of the preceding financial years. The company needs to make a proper disclosure of the change in accounting policy in the company’s books of account as the change will materially affect the company’s financial position.
It is the liability of every company to comply with the ethical responsibility and governance rules specified in the company’s code of conduct. All the material information regarding company’s policies needs to be disclosed by the management and accountant such that the stakeholder’s interest will not be compromised at any cost (Burton & Jermakowicz, 2015). As profit earning is not the only aim of the company. Every company has some social and ethical responsibility to maintain its goodwill. If company violates the interest of stakeholders then penalty and fines will be imposed on the company (Henderson, Pierson, Herbohn & Howieson, 2015).
In this case the company changed its method of accounting as the method of charging depreciation is changed from Straight line to Sum-of-years-of-digits method but the accountant did not disclosed the same in its books of accounts. The company manipulated the financial statements of the company without any disclosure which is not in the interest of the stakeholder’s. The company is liable for the penalty as company has not complied with its ethical responsibility. It is mandatory for every company to follow its ethical responsibility and contravention to this will affect the goodwill of the company. The company is liable to secure the interest of its shareholders.
The success of every business is dependent on its shareholders of the company. Every company is liable to take care of the interest of its shareholders as they are the keen users of the financial information of the company (Adisa & Nkem, 2011). The decisions which are related to shareholders taken by the company are to be approved by the shareholders in the shareholders meetings. The change in methods of accounting plays a major role in the company’s financial information and needs proper disclosure as well. These decisions cannot be taken by the accountant and the manager of the company only they are to be passed by special resolution and shareholders consent is important as these will materially affect the company’s financial information (Beatty & Weber, 2003). If company fails to follow the requirements of the law then they will be penalised and fines will be imposed on them. It is necessary for every company to take the stake of stakeholders before passing any resolution which materially relates to the financial statements of the company (Haddadi, 2014).
In this case as The Manager himself and the accountant did taken the decision to change the method of charging depreciation without taking the consent of shareholders and without conducting any meeting and no resolution was passed by them. The deed of the manager and the accountant is in contravention to the law and the guiding principles of the company and company and its manager and accountant will be penalised for the same as contravention of the laws and orders is a serious case and fines and penalties will be imposed on the company. The manager and accountant were trying to manipulate the financial information just for the sake of presenting a better financial performance of the company in the eyes of the investors and key users of financial information. They have not passed any resolution and in fact accountant did not disclosed the change in the books of accountants of the company as he thought that the reason for change is not genuine and will badly impact the goodwill of the company. The non-disclosure of crucial financial information will influence the minds of the stakeholders negatively and ultimately that will affect the goodwill of the company.
Conclusion:
The general manager of the company did approached the accountant of the company for changing the method of charging depreciation just to make the financial information of the coming years looks comparative with the previous years. The reason for change is not valid in the eyes of the accountant that’s why he did not disclosed the same in the books of accounts of the company under notes to accounts. The manager focused on the prediction given by some of the economists as there will be slow down in the economy in the coming financial years. To get rid of the effect of the economy slow down manager approached the accountant to suggest out some ways to make the profit figures of coming years in line with the profits of the previous financial years. The manger concluded that the method of charging depreciation will retrospectively affect the company’s profit and the coming years profit will come in line the previous year’s profit, but the manager contention for changing the accounting method is not in line with laws and rules governing the company. As the change in the accounting method is just only to manipulate the mind of the investors. The company will get penalised as the reason for changing the method of charging depreciation is not valid in the eyes of law. The accountant and manager will also be penalised for manipulating the financial figures and that too without the consent of stakeholders. The accountant did not disclosed the information in the books of accounts of the company which is a wrongful deed as all the material information needs proper disclosure in the books of accounts under the head notes to account to make the understanding of financial information clear in the mind of the investors.
References:
Adisa, A. O., & Nkem, I. E. (2011). Application of depreciation methods in costs of fixed assets in selected commercial banks in Damaturu, Yobe State, Nigeria. International Journal of Economic Development Research and Investment, 2(1), 80-93.
Ashbaugh, H., & Pincus, M. (2001). Domestic accounting standards, international accounting standards, and the predictability of earnings. Journal of accounting research, 39(3), 417-434.
Beatty, A & Weber, J (2003). The Effects of Debt Contracting on Voluntary Accounting Method Changes, The Accounting Review: January 2003, 78(1), 119-142.
Bragg, S. M. (2010). Wiley GAAP: Interpretation and Application of Generally Accepted Accounting Principles, John Wiley & Sons.
Burton, G. F. & Jermakowicz, E. K. (2015). International Financial Reporting Standards: A Framework Based Perspective, Routledge.
Gabriel, S. J. (2010). Financial Accounting, Tata McGraw-Hill Education.
Haddadi, M. H. (2014). The Study Content And Its Relation To Depreciation And Return On Equity Prices In The Industry With Emphasis On The Tehran Stock Exchange.
Henderson, S, Pierson, G, Herbohn, K & Howieson, B (2015). Issues in Financial Accounting, Pearson Higher Education AU.
Kiesko, D. E., Weygandt, J. J. & Warfield, T. D. (2010). Intermediate Accounting: IFRS Edition, Volume 2, John Wiley & Sons, USA.
Tsamis, A., & Liapis, K. (2014). Fair Value and Cost Accounting, Depreciation Methods, Recognition and Measurement for Fixed Assets. International Journal of Economics & Business Administration (IJEBA), 2(3), 115-133.
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