Sunshine Ltd is a large department store; currently it is using
strait line deprecation method. Recently Sunshine Ltd experienced profit for
the year ended 30 June 2015; it is predicted that there will be an economic
slowdown in the year 2018 and 2019. By
viewing the current market trend, the manager, Kam Sunshine approached the
accountant, Maria Mars to reduce profit of couple of years and transfer the
profit in the economic slowdown years. Maria did not fell right about the idea
of general manager but she is worried about her job; she thought that, they
would terminate the contract and she might lose the job if she did not do so.
Maria changed the depreciation method to sum of years digits as
expected by manager but she failed to disclose the information about the
changes because she felt that the credit will goes to the manager and this will
not give her a good impression at the company.
The report will analyze the current deprecation methods and changed
deprecation method of the company; the effect on profit due to the change in
deprecation method will be viewed. Furthermore, the role of accountant in
changing deprecation method along with the profit will be analyzed. There will
be a short description on ethics and corporate governance along with recommendation
and conclusion at last.
Straight Line Deprecation Method
Straight line depreciation method is the generally used method of
depreciation. Because of its simplification, many business houses use this
method; no further estimation about the economic benefits pattern over the
useful life of an asset can be made because it reduces profit evenly throughout
the useful life of an asset. In this method, the amount of depreciation is same
over the useful life of a fixed asset.
Straight line depreciation is calculated as:
Initial Cost- Residual Value
Sum-of-Years’ Digits Deprecation
Sum of year digits method is more appropriate and mostly used method
nowadays. This method stands on a reality ground i.e. the deprecation amount
will be higher at beginning years and later on the amount of the depreciation
decreases as the useful life of an asset decreases. It is assumed that the
assets will be more productive when they are new and the productivity decreases
as they become older. So using this
method, greater portion of the asset’s value is deducted in the earliest year
and lesser amount is deducted in the later years.
Sum of year digits deprecation is calculated as:
n (n+1) where n = estimated useful
Effects of Deprecation Method on
Although deprecation is non-cash expenses, it has a crucial effect
on business’s net income and, therefore on its tax computations, investment policies,
financial ratios, dividends, loan covenants, incentive schemes and
compensations, regulatory requirements, and many more.
Using straight line
deprecation method, the same amount is deducted throughout the useful life of
an asset. So, as suggested by management to reduce the profit in beginning
years and transfer it to later year, it cannot be achieved with the use
straight line deprecation method because the deprecation expenses will have a
uniform effect on profit every year. In a nutshell, for the year ended 2015,
2016, 2017, 2018, and 2019 the deprecation amount will be same and the same
amount is deducted from the profit of Sunshine LTD.
Because of the higher deprecation amount is deducted at the
beginning of the year, the profit amount
of Sunshine LTD will be reduced in the year 2016 and 2017 by using sum of the
year digits method. During the beginning years, higher deprecation amount means
lower profit and lower profits means lower tax, this will result to tax savings
and sum of the year digits method push these savings forward to times of
economic slowdown that is expected in the year 2018 and 2019 which meets the
demand of the general manager Kam Sunshine.
Australian Accounting Standards
Board 116 (AASB 116)
Accounting Standards Board is a body of Australian Government that develops and
maintains widely applicable financial reporting standards. AASB also helps
Australian community to participate in world economy by setting global
financial reporting standards. AASB was formulated on 15 July 2004; later on
Australian government made some changes and stated that the compiled version
should be implemented to annual reporting periods beginning on or after 1 July
Specially, AASB 116 deals with the accounting treatment of property,
plant and equipment; recognization of assets, determination of their carrying
cost and their deprecation charges falls under it. The standards provide the
bird eye view to the information seeker about the business’s investment in its
property, plants and equipment and the changes in such investment. This
standard does not apply to property, plants and equipment listed as noncurrent
assets held for sale and discontinued operations.
Role of Accountant in an
The main role of accountant in an organization is to prepare all
financial documents after analyzing accounting data and disseminating
accounting information to manager, shareholder, and stakeholder.
Information flow is the crucial part in any organization; all the
organization departments should pass information to each other so that the
decision can be made on time. Especially accountants need to be in direct
contact with the manager because any financial changes and amendments could
only be done according to the financial report submitted by accountant. Any
misleading information or late flow of information will bankrupt an
organization or may cause serious financial slowdown in an organization.
Accountants can choose one of the depreciation methods among different that
suits their organization. Depreciation is non-cash expenses and generally used
to reduce company’s net income so that they have to pay less tax. This is a
duty of an accountant to choose depreciation method and give suggestions to the
manager regarding financial issues.
In the given case, Maria Mars did the right thing by changing
depreciation method from straight line to sum of the years digits as said by
manager Kam, but by not disclosing the information about the changes she did
her big mistake. This incident may cause serious problem to Sunshine LTD as
shareholders and stakeholders should also be informed about the major changes
in an organization. They may not know that changing depreciation method is not
a change in accounting policies; it is only a change in accounting estimate.
Ethics is a moral principle that guides person’s behavior on what is
wrong and what is right. Using ethical guidelines one distinguish between right
and wrong, basically in term of right obligation, welfare to society and
fairness or specific virtues. In the today’s world of business, ethics in
Accounting is one of the most important but yet most misunderstood topics. In
the field of business, ethic tries to answer whether specific business practice
is acceptable or not?
Every action taken in the business world is or will be judged as
ethical or unethical, as either right or wrong. The nature of business ethics
is vast and controversial. There are no universally acceptable rules and
regulations that may guide ethics .Ethical behavior from professional view
point also involve taking ethical actions based on consequences of alternative
In this current unpredictable and complex business environment ,the
professional accountant are also increasingly facing difficulties in both
business and professional environment, as a result pressure for more ethical
behaviors are also growing, as the accounting professional serves the public interest they need to
understand what is expected and make a move accordance with their interest,
accounting profession must be objective and they should avoid buyers, they show
professional competence and due care while dealing with clients.
Accountants of sunshine limited ,Maria mars action was
unethical she failed to disclose the
information about the change in
depreciation method .As all know that accounting course professionals conduct significantly influence
the behavior and judgments of practicing
accountants ,she should have followed company’s
accounting course of professionals
Corporate governance is a set of rules chain of command system and
processes within and corporate the governance and controlled authority.
Corporate governance helps in balancing the interest of company shareholders
management, customers, suppliers, financiers, government and the community.
Good corporate governance creates a transparent set of rules and controlled and
followed by every person in an organization. Since good corporate governance is
directly linked with the organization performance, everyone should be bound by
organizational rules and regulations to ensure that the employee performance is
attending the organizations objectives.
Since the core function of accountant is to track the company’s
financial performance ,the action of an
accountant plays an important role in determining how a company fulfill its
corporate governance policies accountants is liable for project planning
,project alterations ,public responsibility ,shareholder responsibility and
income management. If an accountants fails to address as on good corporate
governance it will have an adverse effect on organization.
After analyzing the case given, I can conclude that Maria lacks
knowledge of corporate governance everyone should have knowledge and should be
bound by corporate ethics and governance and it is most for those in leadership
In an nutshell, the use of some of years digit method in
depreciation will fulfill the requirement of management as purpose by manager the profit amount is
deducted at the beginning years ,the tax saving can be used later on economic
slowdown. This is because the higher amount of depreciation is deducted at the
beginning years and the amount will decrease the later years resulting in increasing
in profit. But this cannot be achieved with the use of straight line method of
deprecation because it deduct same amount throughout the useful life of assets.
Sunshine Ltd has bad corporate governance and ethics since Maria did not
disclose the information about the change of depreciation method, I can
conclude that the set of rules of where not uniformly made and she was doing
The Sunshine Ltd Company was using straight line depreciation
method, which charges the equal deprecation amount throughout the useful life
of assets. As suggested by company general manager, the accountant made changes
in depreciation method to sum of years digits method which charges higher
amount of depreciation amount at the beginning years and lower amount at later
years as decided by management. The action was good and acceptable but after
making changes in depreciation method and in financial statements, the
accountant, Maria Mars failed to disclose the information to the management. It
is necessary to have a direct and constant interaction between manager and the
accountant about the company financial position. But in the above case, we can
see that the information about the changes was not disseminated to manager.
The behavior of the accountant seems to be unethical and against
corporate governance. According to the code of ethics, everyone should act
rationally not only in behave of oneself but also of others keeping right and
wrong in mind. Corporate governance sets acceptable rules and regulations that
must be followed in an organizational setting. By violating company’s norms and
values, the accountant, Maria Mars did not disclose the facts to the manager
and other stakeholders. So Sunshine Ltd should setup a code of rules and should
make a mechanism to flow information thought the company by maintaining
confidence in the company’s integrity, by taking legal obligations into account
in order to meet expectations of stakeholder and accountability of people
reporting and examining reports of unethical practices.