In your response highlight ethics & governance, accountant’s role in changing depreciation methods, stakeholders and the impact of AASB116? Students must provide 8 academic references to support their response.
The issue that has been provided in the case study is that the accountant of the organization, Sunshine Limited has been approached by the general manager Kam Sunshine for the purpose of making certain modifications in the incoming profit of the firm in a discrete nature. Since then Maria Mars has been in an ethical dilemma as the renewal of her contract with the firm, has been one of the major concerns of Maria. Maria has the knowledge that the task she has been asked to execute is unethical in nature. However, she changes the technique of depreciation from the straight-line method to the sum-of-years-digits’ method. Therefore, the stakeholders of business that have been identified in case of the case study consists of the communities, governments, partners, customers, suppliers, general manager, creditors and the employees of the organization. The ethical issues that have been reflected in the case study have been aimed to analyze further. The regulatory policies violated by the company have also been discussed. These violations include breach of integrity, transparency and objectivity. The undertaken action of changing the depreciation method to straight-line method by Maria, has also been discussed in regards to adherence to AASB 116 (Abreu 2015).
The concept of ethics and governance revolve around morality. However, it should be noted here that the issue of morality is not forced on anyone. Nevertheless, it is always recommended to follow the ethical standards as it not only beneficial for the particular entity but also for the stakeholders of business who depend on the improved performance by the organization (Bansal 2014). The identified issues that are particularly related to ethics and governance of Sunshine Limited can be listed down as follows:
The shareholders that are associated with a particular organization, have the right to know about the profitability of their investment. On the basis of the change in profitability in regards to their investment, they make the financial decision whether or not to keep the shares in the particular organization. The particular change in the method of depreciation executed by Maria Mars and devised by the general manager Kam Sunshine had been done for satisfying the shareholders so that they believe that the firm has been dealing in a certain profit. This justifies the the lack of integrity and transparency in the financial statements of Sunshine Limited (Caglio and Cameran 2017).
The issue that is apparent from the situation is that the general manger of the organization commits fraud and cheats the senior management of Sunshine Limited for fulfilling his own personal interest. The accountant willingly or unwillingly has helped him in achieving the same. The accountant has changed the actual method of depreciation used by the organization. This would definitely result in a variance in regards to the timing of the total depreciation. This can also impact the process of decision making of the shareholders. The primary responsibility of an accountant lies in ensuring that the financial statements of an organization represent the true and fair value of the financial performance of the organization which is essentially violated in case of the specified situation. Thus, the changing of the method of depreciation by the accountant is against the accountants’ working ethics that violates the objectivity principle (Cernusca caes et al., 2016).
The information that has been provided in the case study state that the accountant of the organization has allegedly changed the method of depreciation from straight-line method to the sum-of-years-digits method. The sum-of-years-digits method had been used with the intention of minimizing the levels of profits from the approaching financial years so that it could be transferred to the years of 2018 and 2019 in order to fight with the economy slowing down. This particular phenomenon can be justified with the following example:
Asset cost = $400,000
Useful Life = 5 years
Salvage value = $40,000
Both the methods of straight-line depreciation and the sum-of-years-digits depreciation have been shown and a comparison has been drawn as follows:
Straight-line method of depreciation:
Straight-line depreciation = (Cost of asset – Salvage value)/ Useful life
Straight-line depreciation = ($400,000 – $40,000)/5 = $72,000
Sum-of-years-digits method depreciation:
Sum-of-years-digits method = Depreciable base * (Left over useful life/ Sum-of-years-digits)
Sum-of-years-digits = n (n+1)/2
Sum-of-years-digits = 5 (5+1)/2
Sum-of-years-digits (SYD) = 15
|
Years |
Depreciable base |
Left over useful life |
SYD |
Applicable percent |
Yearly depreciation |
|
1 |
$360,000 |
5 |
5/15 |
33.33% |
$120,000 |
|
2 |
$360,000 |
4 |
4/15 |
26.67% |
$96,000 |
|
3 |
$360,000 |
3 |
3/15 |
20.00% |
$72,000 |
|
4 |
$360,000 |
2 |
2/15 |
13.33% |
$48,000 |
|
5 |
$360,000 |
1 |
1/15 |
6.67% |
$24,000 |
|
Years |
Straight-line depreciation |
Yearly depreciation (SYD) |
Variation |
|
1 |
$72,000 |
$120,000 |
($48,000) |
|
2 |
$72,000 |
$96,000 |
($24,000) |
|
3 |
$72,000 |
$72,000 |
Nil |
|
4 |
$72,000 |
$48,000 |
$22,000 |
|
5 |
$72,000 |
$24,000 |
$48,000 |
The necessary modification in the method of depreciation would result in the increase in the amount of depreciation in the initial years. However, it would decrease in the later years. Therefore, the total amount of profit would remain fixed in the due course of time as the depreciation charges would decline over the years. This particular feature has enabled the accountant Maria Mars to change the procedure of depreciation from straight line method to sum-of-years-digits method for the general manager of Sunshine Limited (Ghahramani, Soleymanpor and Fatahi 2016).
The term stakeholders refers to the group or individual or corporate entity that is concerned about or shows interest in another organization or entity. The major stakeholders of the firm Sunshine Limited can be listed down as follows:
The customers fall under the domain of external stakeholders in case of Sunhsine Limited. The consumers are the potential customers in case of a retailer firm. therefore, the long term success of business can be ensured by the act of drawing, developing and holding onto the loyalty from core customers. In the case of transactions being carried between business to business firms the organizations itself are the clients for the particular product that has been purchased for commercial use. The trade resellers are directly engaged with the process of selling to the wholesalers or retailers but the end customers, in such a case is also regarded as a potential stakeholder (Hu, Percy and Yao 2015).
The community and the government are also the external stakeholders of Sunshine limited. The fact that an organization operates within a community, enables it with the power of influencing beyond just its potential customers. Along with the payment of taxes it is also expected from an organization that it maintains an ethical standard and ensures the sustainability of the environment in which it operates. Furthermore, the association with charitable events is also expected from an organization. The regulations imposed by the government can drastically affect the business undertaken by Sunshine Limited. Therefore, it is recommended for the management of the firm to maintain a respectable association with the local officials for the purpose of knowing about the implementation of new regulations or other community developments that may affect business (Parle, Joubert and Laing 2017).
The partners in business and the suppliers are the most essential stakeholders of business in the current scenario. The development of strong and loyal relationship with the business partners and associates benefits business in a huge number of ways. The particular organization of Sunshine Limited would be benefitted by the development of strategies, shared vision and common goals. The trade partners can also benefit business by delivering valuable service to the end customers. The trade partners are also expected to behave in an ethical manner for securing the customers of Sunshine Limited (Loyeung and Matolcsy 2015).
The creditors refer to the entity or the group from where the business leverages finance for carrying out the necessary business proceedings. The banks provide loans for the purpose of major purchases like land and building. The existing band of creditors for Sunshine Limited would naturally expect the meeting of deadlines in regards to the payments that are to be made by the organization. It has to be understood by the management of Sunshine Limited that the meeting of the expectation of the creditors would benefit business by winning their which in turn would increase the chances of profitability and leveraging more finance in future (Masino 2016).
As provided in the question, Maria Mars is responsible for creating the accounting statements and altering the amount of revenue from 2016 to 2017 and from 2018 to 2019.
As provided in the case study the general manager of Sunshine Limited is Kam Sunshine. This individual holds the position of the general manager whose primary motive is improving the overall performance of the organization.
The shareholders are the persons who have potentially invested in Sunshine Limited and does benefit simultaneously with increased revenues that has been earned by business.
At the end of the financial year of 2015, the general imager of Sunshine Limited has requested the accountant, Maria Mars for finding a solution in regards to minimizing the profit from the financial year of 2016. Therefore, the main intention of the general manager has been displaying the fact that the firm has incurred profits in the consecutive future financial years to come. This would help the firm to retain its financial performance in respect to its existing band of shareholders and would help it acquire new shareholders of business. The solution to achieve such an effect has been devised by the accountant. Maria has changed the method of depreciation from the straight-line method to sum-of-years-digits method. The accountant has not stated this fact in the financial statements of the company (Wilson, Strong and Mooney 2016).
The Australian Accounting Standards Board (AASB 116) in relation to the property, plant and equipment is a regulatory standard that is applicable to all the reports that are prepared on or after the date of 1st July, 2009. The primary logic behind the establishment of this standard is to regulate the accounting policies in regards to property, plant and equipment for discerning users of the financial statements concerning the corporation investment on such assets and modifications in such investments. The prime issues that are faced by accountants in treating the property, plant and equipment is realization of these assets, ascertaining the carrying amounts, changes in regards to depreciation and the subsequent impairment losses (Yao, Percy and Hu, 2015).
In the issue that has been provided in the case study, Maria has changed the method of depreciation from straight-line method to sum-of-years-digits method. While depreciating a particular asset cost is distributed over the useful life. Business entities are concerned with correctly depreciating its fixed assets. This is because the amount of depreciation charged significantly affects the net income of the organization. Moreover, the cost is distributed as an expense of depreciation among the period in which it is expected to be utilized.
The particular method to calculate depreciation is specified by the accounting standards of the particular country in which the firm operates. The method incorporated for computing the depreciation related expenses have been several. This includes straight-line method, declining balance method and sum-of-years-digits method.
The sum-of-years-digits method is a future oriented technique of depreciation. The formula for calculating the depreciation under sum-of-years-digits method is as follows:
SYD depreciation = Depreciable base * (Left over useful life/ Sum-of-years-digits method)
The straight-line method of depreciation is the most commonly used method of depreciation. It is generally utilized in the when the availability of the specified method as to how the asset will be utilized over the years, is not available. The formula for calculating the depreciation is as follows:
Depreciation per year = (Cost – Residual value)/ Useful life
The general manager of Sunshine Limited in order to hold on to the existing band of shareholders has adopted unethical measures to secure profit in the future financial years to come. The accountant of the organization has achieved this by changing the technique of depreciation to sum-of-years-digits method. Moreover, such a major change has also not been included in the financial statement disclosure. Thus, it can be evidently concluded that the accouitng statements of Sunshine Limited have not been prepared in accordance to the AASB 16 standard.
Conclusion
The fact that the general manager of the organization had requested the accountant to bring about changes in the financial statements that does not reflect the true and fair view of the financial performance by the company violates the ethical code of conduct. The accountant however, out of concern for her renewal of contract and negative feedback, executes the particular task by changing the method of depreciation. Though this does not affect the amount of total profit due to the minimized charges of depreciation, the non disclosure of such an event in the financial statements makes the accounting statements non-conforming to AASB 116
References
Abreu, R., 2015. Accounting for Citizenship: The role of Accountant. Procedia Economics and Finance, 26, pp.933-941.
Bansal, A., 2014. An empirical study of teaching ethics on accountancy students. International Journal of Business and Administration Research Review, 1(3), pp.152-157.
Caglio, A. and Cameran, M., 2017. Is it Shameful to be an Accountant? GenMe Perception (s) of Accountants’ Ethics. Abacus, 53(1), pp.1-27.
Cernusca, L., David, D., Nicolaescu, C. and Gomoi, B.C., 2016. Empirical study on the creative accounting phenomenon. Studia Universitatis „Vasile Goldis” Arad–Economics Series, 26(2), pp.63-87.
Ghahramani, B., Soleymanpor, M. and Fatahi, R., 2016. ETHICS IN ACCOUNTING AND AUDITING. IIOAB JOURNAL, 7, pp.293-299.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB 116 non-current asset measurement models. International Journal of Critical Accounting, 6(5-6), pp.509-519.
Loyeung, A. and Matolcsy, Z., 2015. CFO’s accounting talent, compensation and turnover. Accounting & Finance, 55(4), pp.1105-1134.
Masino, A., 2016. Modifying the Certified Public Accountant Application Process for Academic Misconduct.
Parle, G., Joubert, M. and Laing, G.K., 2017. Measuring economic performance of Real Estate Developers in Australia:(A Longitudinal Study). Journal of New Business Ideas & Trends, 15(1).
Shawver, T.J. and Miller, W.F., 2017. Moral intensity revisited: Measuring the benefit of accounting ethics interventions. Journal of Business Ethics, 141(3), pp.587-603.
Vorster, J., 2015. Negotiating the ethics minefield: industry insights-ethics. Professional Accountant, 2015(25), p.23.
Walsh, J., 2014. The Role of Ethics in a Future Accounting Career.
Wilson, B., Strong, J. and Mooney, K., 2016. AN EXPLORATORY INVESTIGATION OF EFFECTIVE ACCOUNTING ETHICS CPE. Journal of International Business Disciplines, 11(2).
Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), pp.31-45.
Yao, D.F.T., Percy, M. and Hu, F., 2015. Journal of Contemporary Accounting & Economics. Journal of Contemporary Accounting & Economics, 11, pp.31-45.
Yarahmadi, H. and Bohloli, A., 2015. Ethics in Accounting. International Journal of Accounting and Financial Reporting, 5(1), pp.356-360
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