The provided information is on the company named Sunshine Ltd and the general manager of the company Kam Sunshine went to the accountant, Maria Mars for reduction in profit. The major motive of Kam is to do some modification in the upcoming profit of the company. This aspect has created an ethical dilemma on Maria Mars due to her concern for the renewal of her contract with the company. This has led to Maria to change the method of depreciation from straight-line method to sum-of-year-digit method in spite of knowing the unethical nature of this action. In this particular case, the major stakeholders are shareholders of the company, local community, government, employees, customers, suppliers, accountant, general manager and creditors. With the action of Maria, she has breached three major ethical principles; they are Integrity, Transparency and Violation of Objectivity.
Ethics and Governance is highly related with morality and they are not compelled to anyone. In the presence of ethics and governance, the confidence of the stakeholders uses to increase on the quality of the work of the company. Following are the major ethical and governance related issues related with Sunshine Ltd:
Lack of Integrity and Transparency: It is the authority of the shareholders of the companies to get information about the profitability of their investments in the company. According to the change in the profitability of their investments in the company, they use to take decisions whether they will keep the shares of the company or not. In order to provide satisfaction to the shareholders, the general manager of Sunshine Ltd has taken the way to change the method of depreciation in order to create illusion to reduce the level of profit. It shows the lack of integrity and transparency from the side of Sunshine Ltd for the depiction of accurate financial information to the users of financial statements.
Breach of Objectivity: It can be observed that the general manager of Sunshine Ltd has used the management of the company in order to be personally benefitted and the accountant of Sunshine Ltd, Maria Mars has assisted him to achieve it. The use of different method of depreciation can be seen in Sunshine Ltd I order to devalue the assets so that the company can become beneficial from future benefits. Variance in the timing of depreciation can be seen as Maria has changed the method of depreciation. It is the responsibility of the accountants to disclose accounting information in the most truthful way to the stakeholders. For this reason, the work of Maria has violated the principles of objectivity of accounting ethics and governance.
The case study of Sunshine Ltd states that Maria has taken the decision of changing the depreciation method from to sum-of-years-digit method from straight-line method. The main aim of this action of Maria is the minimization of profit level in the upcoming years so that they can be transferred in the years of 2018 and 2019 in order to counter the predicted economic downturn. The following illustration helps in showing the same:
Cost of the asset = $500,000
Useful life of the asset = 5 years
Salvage value of the asset = $50,000
Following shows the comparison of profit by using straight-line method and sum-of-years-digit method of depreciation:
Straight-line Method of Depreciation:
Straight-line depreciation = (Cost of asset – Salvage value)/ Useful life
Straight-line depreciation = ($500,000 – $50,000)/5 = $90,000
Sum-of-years-digits Method of Depreciation:
Sum-of-years-digits method = Depreciable base x (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
Statement showing variation in deprecation:
After changing the method of depreciation, it can be observed that there is an increasing trend in the beginning of the years; the amount of depreciation would decline in the later years. With the help of this, the company will be able to keep a consistent level of profit in the next two years as a result of decrease in the charge in depreciation. In this particular manner, Maria Mars has played a vital role in caging the method of depreciation.
The following discussion shows the brief discussion about the major stakeholders of Sunshine Limited:
Customer: Customers can be considered as the most important stakeholders that Sunshine Ltd needs to consider. In retail, consumers are treated as customers. The long-term financial success of the companies can be achieved with the help of drawing, retaining and developing loyalty from the core customers. For business-to-business companies, firms are considered as the customers buying products for various use. In case of the retailers and the wholesalers, trade resellers are considered as the customers and they need to be considered as the major stakeholders.
Communities and Government: Communities and government are considered as external stakeholders and they have close association with the business activities of Sunshine Ltd. The activities of the company have influence on the communities as the company operates in the communities. Incur of taxation expenses can be seen in the companies and the resident of the communities expect the companies to operate in ethical and sustainable manner. Apart from this, it is also the expectations of the communities that the companies will be associated with various community events. Different types of decisions of the government entities can affect the operations of Sunshine Ltd. Thus, it is expected from the managers of Sunshine Ltd to maintain a good relation with the government officials for the estimation of regulatory changes.
Partners and Suppliers: Business partners and suppliers are critical stakeholders for the business organizations. Business organizations always try to develop good relationship with the suppliers and associates. This would be helpful for Sunshine Ltd in the development of common goals, visions and strategies. The contribution of trade sellers and buyers cannot be denied in the delivery of maximum value to the end customers.
Creditors: Many times the organizations have to use the lenders in order to fund their businesses, purchase of assets and the purchase of supplies. It can be seen that the banks lend money to the firms for the purchase of new buildings. Sometimes, the suppliers provide products on credit basis and take money later. It would be the expectation of the creditors of Sunshine Ltd to make the payments within the deadline.
Accountant: The provided case study of Sunshine Ltd states that Maria Mars is the accountants of the company and has the reasonability to prepare the financial statements of the company along with the change in profit from 2016 and 2017 to 2018 and 2019.
General Manager: As per the case study of Sunshine Ltd, Kam Sunshine is the general managers of Sunshine Ltd and he has the responsibility to take responsible decisions for improving the business operations of the company.
Shareholders: Shareholder are the persons investing in the equity shares of Sunshine Ltd in order to take advantage of the profit of the company. Shareholders are considered as the major stakeholders of the company.
The provided case study of Sunshine Ltd states that Kam Sunshine has requested Maria mars to find a way to minimize the profit level for 2016 and 2017 after 30 June 2015. The main motive of this action was to get consistent amount of profit in two years in order to satisfy the shareholders. As a result, Maria has changed the deprecation method from straight-line to sum-of-years-digits method and she has not disclosed this change in depreciation in the notes of financial statements.
The Australian Accounting Standard Board (AASB) 116 is related with the valuation of property, plant and equipment and it can be applied for the reporting of mentioned assets starting on or after 1 July 2009. The main international of AASB116 is to demand for the accounting treatment of property, plant and equipment in order to provide this information to the readers of financial statements related to the company’s investment on these kinds of assets and the investment modification. The major accounting issue related with the calculation of property, plant and equipment are the realization of the assets, determination of the carrying value of the assets, process of modification of depreciation and the determination of impairment profits and losses.
In case of Sunshine Ltd, Maria Mars has changed the deprecation process from straight-line to sum-of-years-digit method. In this case, the main idea related with deprecation is the distribution of the value of assets over the useful lives of the assets. It has been observed that the business organizations use to determine depreciation on their fixed assets and non-current asset for both tax and accounting purposes. The impact of former can be seen on the reported net income of the companies while the effects of the latter can be seen on the statement of balance sheet of the companies. Initially, the apportionment of the cost is done in depreciation expenses form among the asset utilization period.
Companies use to realize this expense for the purpose of tax and financial reporting. Divergence can be noticed in the method of depreciation and the years of depreciation between the kind of asset in the identical businesses along with different tax purposes. Due to the presence of various standards and laws, variation among them can be seen from country to country. Different types of methods can be seen for the calculation of deprecation; they are straight-line method, diminishing balance method, sum-of-years-digit method and others.
The sum-of-years-digit technique for depreciation is considered as an accelerated technique for the determination of depreciation of the assets. The formula used under sum-of-years-digit method of deprecation is shown below:
SYD depreciation = Depreciable base x (Left over useful life/ Sum-of-years-digits method)
This method has been developed in order to reflect the consumption pattern of the fundamental assets. Moreover, in the absence any kind of pattern for the utilization of the asset, this particular technique of deprecation is used. The uniform change in the cost of asset over the useful lives can be seen under the straight-line depreciation method. Effective use of this method can be seen where aim is to realize the value of assets uniformly in the lifetime. The formula of this is shown below:
Depreciation per year = (Cost – Residual value)/ Useful life
In Sunshine Ltd, it is the responsibility of the management to take decisions for their business operations. In this context, Kam Sunshine breached the rule of the company by taking his decisions that has direct effect on the financial statements of the company. In addition, in the change of depreciation method, the consent of all the shareholders is required. Hence, it can be observed that Maria Mars has not complied with the requirements of AASB116.
Conclusion
The above discussion shows that the actions of Kam Sunshine and Maria Mars have violated the major ethical principles of accounting that are transparency, integrity and subjectivity. It can also be seen that that the accountant of Sunshine Ltd, Maria Mars has changed the depreciation method from straight-line to sum-of-years-digit method out of the fear of the not renewal of contract. This particular aspect can affect the financial statements of the company along with their major stakeholders. As per the above discussion, the major stakeholders of Sunshine Ltd are creditors, employees, customers, community and government, shareholders and others. The above discussion also shows the fact that Maria Mars has not complied with the standards of AASB116 at the time of charging deprecation on the fixed assets.
References
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