In your response highlight ethics & governance, accountant’s role in Changing depreciation methods, stakeholders and the impact of AASB116?
The case study includes the issue of the accountant of the Sunshine Limited that has been approached by the general manger Kam Sunshine in order to make certain modifications in the incoming profit of the firm in a discrete nature. It was then that Maria Mars faced the ethical dilemma on the renewal of her contract with the firm. It has been one of the major concerns of Maria. She knew that she was asked to execute a task that was unethical in nature. Apart from this she changes the technique of depreciation form the straight-line method to the sum-of-years-digits` method. In this particular case study the stakeholders that have been identified are the governments, communities, partners, general managers, suppliers, creditors and the employees of the organization. The report consists of some ethical issues and they have been analyzed in the report. The report also includes a brief discussion about the violation of the regulatory policies of the company. These violations include the objectivity, transparency of the system and the breach of integrity. The method taken by Maria that is the undertaking action of the changing the depreciation method to straight-line has been discussed in the report in regards to adherence to AASB 116 (Abreu 2015).
The concept of ethics and governance revolve around principles. While speaking about morality this should be kept in mind that the issue of morality should not be forced to anyone. It is something that should come from within. Morals and ethics come from within a person. A person never learns the ethics and morals from external sources. It affects the performance of an employee in an organization. The identified issues that are related to ethics and governance of Sunshine limited can be listed down as follows:
The shareholders of any particular organization have the complete right to know about the profit that is the outcome of the investment. The final decisions are made depending upon the change in the profitability in regards to their investment. This acts as a strong standpoint and a firm base of taking the decisions regarding the financial decisions regarding the shares in the organization. The change in the method of depreciation executed by Maria Mars and devised by the general manager Kam Sunshine had been done in order to satisfy the shareholders in order to gain the confidence of them and to gain their trust on their organization. This was done in order to make the shareholders make investment in their organization and to make them believe that the organization is dealing in certain profit. This justifies the lack of integrity and transparency in the financial statements of Sunshine Limited (Caglio and Cameran 2017). This was the instance where the company was seen to break the law of ethics.
The shareholders of any particular organization have the full right to be aware of the scope of profit that they can have by making an effective investment. Based on the change of their profitability in regards to their investment, they take the financial decisions of whether to keep the shares in the particular organization or to keep the shares somewhere else. The change that has been mentioned earlier that was executed by Maria Mars and that was supervised by the general manager had been done for the satisfaction of the shareholders. This broke the feature of transparency of the firm and it violated the integrity of the firm.
The issue that is obvious from the situation is that the general manager of the organization commits the act of fraud and he lands up in cheating the senior management of Sunshine Limited for the fulfillment of their own interest. It was a selfish act on the part of the manger and the accountant was his partner in the crime. This would for sure result in a variance in regards to the timing of the total depreciation. This has a major blow in the decision making process of the shareholders. The sole and the first responsibility of the accountant is to ensure the financial statements of any organizations that represent the true and the fair value of the financial performance of the organization which is violated in case of the specified situation. Therefore the changing of the method of depreciation by the accountant stands in complete contrast with the working ethics of the accountant that violates the principle of objectivity (Cernusca caes et al., 2016).
According to the case study it has been observed that there is an allegation against the accountant to change the method of depreciation from straight-line method to the sum-of-years-digit method. This method had been used with the intention of minimizing the levels of profits from the upcoming financial years in order to make it transfer to the years 2018-2019. This is done in order to fight with the economy slowing down. The flowing example can justify this phenomenon:
Asset cost = 500,000 dollars
Useful Life = 5 years
Salvage value = 50,000 dollars
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 |
In order to increase the amount of depreciation the necessary modifications in the method of depreciation need to be made. This is estimated that it would experience a decrease in the later years. The total amount of profit would remain fixed in the due course of time. It is because the depreciation charges would decline over the years. This feature has enabled the accountant Maria Mars to change the procedure of depreciation from the straight line method to the sum-of-years-digits method for the general manager of Sunshine limited (Ghahramani, Soleymanpor and Fatahi 2016).
The stakeholders are those people who are group or individuals or any kind of corporate entity who shows interest in any organization or entity. The Sunshine Limited firm has a long list of stakeholders in their company. The list of the stakeholders is listed below:
The customers are the external stakeholders in case of this particular organization. The customers are the potential customers in case of a retailer firm. The loyalty of the customers is a prime important thing for the organization in order to survive in the market and to make a long-term relationship with the customers. In case of transactions that are being carried between business to business firms the organizations itself are the clients for that particular product that has been purchased for the commercial use. The resellers of the trade are directly engaged with the process of selling to the wholesalers or the retailers but the end customers. This case can also be referred as the case of potential stakeholder (Hu, Percy and Yao 2015).
Even the communities and the government are also the external stakeholders of Sunshine Limited. An organization operates within a community enables it with the power of influencing beyond just the potential customers. An organization should not only pay the taxes but it must also maintain the standard of the ethics. This would ensure the sustainability of the environment in which it operates. Apart from this the organization must also be associated with the charitable events. The regulation that has been undertaken by the government can drastically affect the business that has been undertaken by the organization. It is because of this reason that the organization must maintain a respectable association with the local officials in order to keep a track of the implementation of the new regulations or other community developments that might affect the business (Parle, Joubert and Laing 2017).
The partners in the business and the suppliers are the most important stakeholders of the business in the current scenario. A good relationship between the business partners and the associates benefits the organization in many ways. The trade partners can benefit business by delivering a valuable service to the end customers. The particular organization would benefit if they maintain a good relation with the suppliers and the partners as the supply is an important aspect of such organization (Loyeung and Matolcsy 2015).
The creditors are those from where the business leverages finance in order to carry out the necessary business proceedings. The banks provide loans for the major purchases like the land and building. The existing creditors for Sunshine Limited would expect the meeting of deadlines in regards to the payments that are to be made by the organization. The management must understand the fact that they should meet up to the expectation of the creditors that would benefit the business of the organization. It would increase the chance of profit of the organization and it would create a situation of leveraging more finance in the future (Masino 2016).
It was mentioned in the case study that the accountant of the organization named Maria Mars was responsible for violating the ethical standards by preparing an incorrect financial statement and changing the amount of profit from 2016 to 2017.
This was also mentioned in the case study about the general manager of Sunshine Limited named Kam Sunshine. He was the general manger of the firm and his primary motive is to improve the overall performance of the organization. He was the supervisor of the accountant in the fault that she had committed.
The shareholders are those who have invested their money in the Sunshine Limited and they does some benefit simultaneously with the increased revenues that has been earned by the 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 disclosed such a 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 applies to all the reports that are prepared on or after 1st July, 2009. The primary motive of this standard is to regulate the accounting treatment 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 the cost of the asset is distributed over its 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 an accelerated 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 and is used in the absence of any specified way as to how the asset will be utilized over the years. The formula for calculating the depreciation is as follows:
Depreciation per year = (Cost – Residual value)/ Useful life
Conclusion
The general manager of the firm in order keep a good relation with the shareholders has adopted certain measures that are unethical. He has done this to make sure there is profit in the future. This has been achieved by making a change in the method from depreciation to sum-of-years-digit method. This change was not recorded in the disclosure of the financial statement. Therefore this can be mentioned that there are evidences that prove that the financial statements of Sunshine Limited have not been prepared in accordance to the AASB 16 standard. Therefore while concluding this can be mentioned that this can be termed as an act of violation of the rules of ethics. The code of conduct was broken by the accountant and the manager which was not a desirable process.
References
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