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INDIVIDUAL ASSIGNMENT COVERSHEET

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Family
Name:

 

 

Tandukar

 

Given Name:

 Bonika

 

 

 

 

Student
Number:

 

11700812

 

      Lecturer’s Name:       Andrew CHEW

 

 

 

 

Subject Name:

 

 

Financial
Accounting

 

 

 

 

 

 

 

 

 

Assignment Title:

 

Individual
Assignment ACC701

 

 

 

 

 

 

 

 

 

 
Declaration
(This declaration must be completed by the
student or the assignment will not be marked.)
I certify the following:
•        
I have read and understood the Student Academic Misconduct Policy
•        
This assignment is my own work based on my
personal study and or research.
•        
I have acknowledged all material and sources
used in the preparation of this assignment including any material generated in
the course of my employment.
•        
The assignment has not previously been
submitted for assessment.
•        
I have not copied in part or in whole or
otherwise plagiarised the work of other students.
•        
I have read and I understand the criteria used
for assessment.
•        
The assignment is within the word and page
limits specified in the unit outline.
•        
The use of any material in this assignment does
not infringe the intellectual property / copyright of a third party.
•        
I understand that this assignment may undergo
electronic detection for plagiarism, and an anonymous copy of the assignment
may be retained on the database and used to make comparisons with other
assignments in future.
•        
By completing this coversheet in full and
submitting this assignment electronically, I am bound by the conditions of the
KOI’s Student Academic Misconduct Policy
and the declaration on this coversheet.
 
 
Date: 19 January 2018

 
 

Change
of Depreciation Method

In
Financial Accounting

Student Name: Bonika Tandukar
Student ID: 11700812
Subject code: ACC701 Financial
Accounting
 

 

 

 
Contents
 
1.      Introduction. 2
2.      Accounting
Standard AASB116. 2
3.      Depreciation. 4
3.1        Depreciation
Methods. 4
·        Straight line method. 4
·        Sum-of-the-digits Method. 4
4.      Ethics
and Corporate Governance. 5
5.      Obligation
of Accountant in switching Depreciation method. 6
6.      Conclusion
and Recommendation. 7
References. 8
 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.    
Introduction

Sunshine
Ltd is a big emporium. The company ended up making a record of profit and
management in 30 June 2015. The company expects the continuity of the same high
profits in at least the next two years (i.e. 2016 and 2017). However an
economic slowdown and subsequent fall in profits in the year 2018 and 2019 has
been generally predicted by economists. The general manager of the store is Kam
Sunshine and the accountant is Maria Mars. Considering the scenario of the
market and the company Kam approached Maria asking her if could come up with
method to reduce profits of the next two years. Kam further added that the
reduced profits can be transferred to 2018 and 2019 and hence over the next few
years this can make the shareholders happy with consistent profits. Although
Maria was not convinced with approach made by Kam, she took the consideration
under her personal insecurity that if she did not do as what Kam said, it might
upset Kam and her contract with company might not be renewed. Maria came up
with a decision of changing the depreciation method. The company was using
straight line method which was changed in the sum-of-years’-digits method.
Maria felt that the general manager’s reason was not of good impression, the
change in financial statement and its notes were not disclosed.

2.    
Accounting Standard
AASB116

Accounting
Standard AASB116 is an accounting standard made by Australian Accounting
Standards Board on August 7, 2015 under the Corporation Act 2001 (section 334)
with an objective to direct the accounting treatment for property, plant and
equipment. It enables the users of financial statement to recognize the
information related to investment or changes in investment by the firm in its
plant, property and equipment. The standard considers plant, property and
equipment of the firm as fixed tangible assets which are purchased with an
intention for productive use (for instance production, rent or administrative
purpose) and future economic benefit within the firm. These assets are
recognized only if they can be measured at its cost. This accounting standard
includes standards related to the cost of these assets, its recognition, its
depreciation, its fair value, its useful life, its’ derecognition and disclosure
of information related to these assets in financial statement.

According
to the accounting standard AASB 116, financial statements should disclose
following information for each class of property, plant and equipment:

1.      Bases
of measurement used to discover the gross cost of the asset

2.      Use
of which depreciation method

3.      Rates
of depreciation or useful lives

4.      Gross
cost of the asset and the accumulated depreciation at period’s beginning and
end.

5.      A
reconciliation of cost at period’s beginning and end showing:

a.       Additions

b.      Sale
of assets

c.       Acquisitions
while business combination

d.      Inclining
or declining results from revaluation

e.       Impairment
of losses recognized or reversed in profit or loss

f.       Depreciation

Preference
of depreciation method and evaluation of asset’s useful life is regarded as
matters of judgment. It is very important to disclose the nature and effect of
change in estimation of accounting with the period which is affected or likely
to have affected. Here the changes refer to changes in salvage value, useful
lives, depreciation method and amount required in removing, restoration and
dismantling of asset. Disclosure of it enables the users of financial statement
to review selected policies and compare the changes. The financial statement
must disclose the information regarding accumulated depreciation at period’s
end and depreciation being recognized as a cost of other assets or in profit or
loss account.

3.    
Depreciation

Property,
plant and equipment are tangible fixed assets that are subject to depreciation.
A systematic portion of recorded cost of asset over its useful life is
depreciation of an asset. Under the matching principal, the depreciation is
used for the fixed assets in order to match the record as expense to the revenue
it generates. Depreciation is periodically allocated as expense on the cost of
an asset over the useful life of the asset. Depreciation enables firm to report
and record assets at their net book value (original purchase price –
accumulated depreciation). In addition depreciation helps firm in cost recovery
of an asset and tax deduction. Depreciation enables the firm to use the tax-write
off for the payment of fixed asset over time. It is importance for both taxes
and accounting. Depreciation Accounting involves major three inputs: useful
life, salvage value and depreciation method.

 

3.1    Depreciation
Methods

There are varieties of depreciation
method. Depreciation methods classified on the basis of time are: straight line
method, declining balance return and sum-of-the-year’s-digits method.

·                    
Straight line method

Straight line method of depreciation is
considered to be the most simplest and default depreciation method that
computes the depreciation amount by subtracting the book salvage value of asset
from the original purchase price and dividing the result by useful life of
asset. Equal amount of depreciation is expensed every accounting period with
same amount of effect in profit throughout its life.

       

·                    
Sum-of-the-digits
Method

In this method of depreciation, depreciation expense
is calculated such that the difference of principal purchase price and book
salvage value is multiplied with a fraction. Here the fraction is calculated by
dividing the total useful life by sum of the year digit. For each successive
year the fraction is deducted by a unit in the numerator.  Depreciation expense under this method
differs each accounting period because the initial depreciation is greater and
then it declines in each coming year.

Here, ‘n’ indicates useful lives of the asset.

For
instance, a firm purchased a technology of $100,000. Its book salvage value is $10,000
nad useful lives of the technology is 5 years.

Using
the above formula, under straight-line method, the depreciation expense equals
to $18,000 per annum.

Under
sum-of-the-year-digits method, the depreciation expense in the first year is $30,000,
in the second year is $24,000, in the third year is $18,000, in the fourth year
is $12,000 and in the fifth year is $6,000.

4.    
Ethics and Corporate
Governance

Ethics
refers to moral concept that governs a person to determine rightful and
wrongful act. On the other hand governance refers to process of monitoring and
implementing the established policies in a proper way.

Corporate
governance refers to the system or policies that controls and directs a firm.
It necessarily balances the interest of the firm and its’ stakeholders. The stakeholders
of the firm are management, shareholders, customers, financiers, suppliers,
community and government or basically the users of financial statement. It
involves in determining action plans, internal controls, measurement of
performance and corporate disclosure.

There
are major three categories that ASX have classified under corporate governance:
Corporate Governance Statement, Constitution and charters and Policies.  A firm being listed ASX (Australian Securities
Exchange) generates annual report that includes corporate governance statement.
Constitutions and charter involves Constitution, Audit and risk charter, Remuneration
committee charter, Clearing and settlement boards charter, Nomination committee
charter, Board charter and Internal audit charter. Policies and procedures are
implemented in order to brace its dedication to manage the firm’s business
ethically with transparency accountability to stakeholders and market. Some of
the policies classified by ASX are: code of conduct, dealing rules, ASX
anti-bribery and corruption policy, ASX shareholders communication policy, ASX’s
conflict handling arrangements, ASX risk management summary, Clawback policy
and other similar policies.

Accountants
are professional people who are responsible in recording transactions and
preparing financial annual reports. They have ethical responsibility and are
expected with a high level of ethical behavior. For an accountant the basic accounting
ethics are to be bias-free and avoid conflict of influence and interest. More importantly,
accountant should be more objective. But in this case Maria Mars failed to act
ethically. She faced ethical dilemma. She just followed her boss’s instruction
and did not act professionally.  As an
accountant having a huge responsibility of financial statement, she could have
acted on behalf of firm’s prosperity and she should have provided firm with
transparency while bringing change in depreciation. Here she took the
consideration of manager as governance.

5.    
Obligation of
Accountant in switching Depreciation method

Accountants
are the qualified employees recruited by a firm for the job of bookkeeping and
inspecting financial accounts. They prepare annual reports as well as financial
statements of the firm which enables the users of financial statements in
planning, organizing, comparing and decision making. Accountant has
responsibility to all its stakeholders for providing valid financial statements
with respect to applied standards. They have not only responsibility with
stakeholders but with the tax filer or business too. Accountants are required
to keep the information of firm private but have to provide transparency to the
firm and stakeholders regarding the information and changes in the information
in financial statement.

Straight
line method gives equal amount of depreciation expense throughout the life of
the asset. On the other hand the sum-of-the-year-digits method provide greater
amount of depreciation in the previous stage and declines with the life. When
the manager ask Maria to find out a way to reduce profit in year 2016 and 2017,
Maria came up with an idea of changing depreciation method is one of the smart
move  as it reduces the net profit in the
initial years higher than the years later and lower initial tax liability.
Lower amount of depreciation will be deducted from profit in the year 2018 and
2019.

 In accordance of the accounting standard AASB
108, the accountant should disclose the information regarding the change in
depreciation method. This enables the user of the financial information to
identify the net book value of the asset i.e. original purchase value reduced
by accumulated depreciation, to check the condition of asset as per the value,
and decide if it requires dismantling, restoration or replacement and also the
tax benefits. The information is crucial to the stakeholders. Maria should not
only provide the information in the financial statement but first discuss with
management or directors before taking this decision.

6.     Conclusion
and Recommendation

From
the above case it can concluded that any information regarding the firm is
crucial to the firm as well as its stakeholders. Depreciation expense does not
generate cash revenue but enables to identify expenses from the use of asset. In
addition it helps in comparing the income that asset brought as well as
recovering the cost of asset. The selection of depreciation method has economic
effect. Depreciation creates tax benefit. Maria used sum-of-the-years-digits
method that gives greater depreciation expense in initial years. It helped her
to reduce the taxable income of 2016 and 2017 that increased her tax saving. The
tax saving can further be used in 2018 and 2019 to maintain the profit.

She
made a smart move but was unethical. She could have avoided her conflict of
interest and influence and work with honesty, fairness and integrity for the
best interest of the firm. She could have made some research about some ethical
changes and its consequences in the firm, for the stakeholders and herself. If any
of the stakeholders finds out her inability to disclose the change, it can be a
great issue for the firm and her career as well.

To
sum up, it can be recommended that Maria as an accountant should provide
transparency. She can discuss her ideas and their consequences with the manager
before taking action. Ethical dilemmas and conflict of interest and influences
are psychological and behavioral act that employees any profession should deal
being bias free.

References

·         

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