Importance of Change in Accounting Policies and their Disclosure
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.
Changes in method of accounting is a matter of disclosure in books of accounts under the head notes to accounts as any change in financial statements is relevant for stakeholders. The changes in accounting policies of the company depict the crucial financial information of the company (Bragg, 2010). This information affects the stakeholders’ decision making and precise the financial performance of the company. Any change in accounting policy is disclosed in the disclosure head as that make the understanding of financial statements clear and any cause of confusion will not arise in the minds of stakeholders.
In the present case of Sunshine Ltd. Company used to follow straight line method of depreciation but to make the financial performance look constant over the coming year’s company changed the method of depreciation from straight line to sum-of-years-of-digits method. Sunshine Ltd is a large departmental store and making huge profits from last two years but economist predicted a slowdown in the coming years because of that company’s profit will tend to decrease. The general manager of the company approached accountant to suggest out any way to lower down current year’s profit. So that a consistent profit will be maintained in next years that would result in keeping investors happy.
Accountants play a pivotal role in company’s accounting as all the financial statements and related aspects are reviewed and maintained by the accountants of the company. Any change in accounting policies of the company is previewed by the accountants of the company. They know as if what steps are good for keeping the company’s performance good and positive in the eyes of investors. Selection of accounting policies and maintaining it over the years is a part of accountant’s duty and any change in these accounting policies need a proper disclosure in company’s books of accounts. It is mandatory for the company to follow same accounting policies over the years and any change that is either because of changes in governance or for improving the performance of the company is acceptable but that too needs a proper disclosure and that does not violates the principles of accounting (Keating & Zimmerman, 1999). If any company changes its method of accounting and does not provide a proper disclosure then that would penalise the company and its management and accountant’s as well (Beatty & Weber 2003).
In the present case as General manager approached the accountant to change the method of charging depreciation from Straight line to sum-of-years’-of-digits method just to keep the company’s profit constant for coming years that to just for the sake of investors to keep the company’s performance good in the eyes of investors. The accountant cannot change the method of depreciation until and unless that is because of any change in government regulations or because any major necessity of the company. Although the selection of method of depreciation is a matter of judgement for the accountant that too involve the future benefits from such change for the company. The company is not getting any future benefit with that change and company’s goodwill will also get affected with that change. The stakeholders’ trust will also get ruined when they get to know about the falsified act of the company
Violation of Australian Accounting Standard Board
Australian Accounting Standard AASB116 Property, Plant and Equipment says that selection of method of depreciation is a matter of judgement that’s why proper disclosure as to which method is to be followed is required to be made by the company’s. The method of depreciation and rate of depreciation which is followed by the company needs proper disclosure so that the users of financial statements will review, analyse and enables them to compare the company with other companies. A change in accounting estimates also a part of the change in the carrying amount of the property, plant and equipment.
In the present case the company did not followed AASB116 as the reason for change in accounting policy given by the company is not valid. Company also failed to made disclosure of the change in method of depreciation in its books of accounts under notes to accounts. The company violated the rules of Australian Accounting Standard Board which will entertain fines and penalties on the company. The company needs to strictly follow AASB116 as these standards are the guiding principles for the company any contravention to these principles will penalise the company.
Any change in accounting policy of the company has a retrospective effect on company’s financial statements. The company changed the method of depreciation from Straight Line to Sum-of-years-of-digits method that will have a retrospective effect on company’s profit of last years (Kiesko, Weygandt & Warfield, 2010). If the amount of depreciation under Straight Line Method is lower than sum-of-years-of-digits method than company’s profit will be reduced with the same amount and if the amount of depreciation is more under Straight Line method than sum-of-years-of-digits method than profit will be increased by the same amount (Gabriel, 2010).
In this case if company wants to change the method of depreciation from Straight Line to Sum-of-years-of-digits method than company needs to give the retrospective effect of such change as well on the company’s financial statements. The profit figures needs to be adjusted with retrospective effect. Proper disclosure of such change needs to be made in the books of accounts of the company under notes to accounts and profit need to be adjusted with the decrease and increase in the amount of depreciation as any change in accounting policy has a retrospective effect on the prior period financial statements of the company. The accountant needs to disclose such change in financial statements in the books of accounts of the company under notes to accounts and a statement showing effects of change in depreciation on prior years profits needs to be prepared. The proper disclosure under notes to accounts is mandatory if the change in accounting policies materially affect the financial statements.
Every company is responsible to secure the interest of its stakeholders as company’s ethical responsibilities say that company should never violate the interest of its stakeholders. All the necessary details regarding the financial statements of the company need to be disclosed by the company’s in their financial statements to protect the interest of its investors. If company unable to disclose the necessary information regarding financial statements than the company is liable for penalty as that information materially affect the interest of shareholders (Henderson, Pierson, Herbohn, & Howieson, 2015). The company’s ethical conduct and governance responsibility says that company’s main aim is not only to earn huge profits but also to protect the interest of investors and other stakeholders/ users of financial statements. So if any material information is not disclosed by the company then that affects the stakeholders and company violated its ethical code of conduct.
Retrospective Effect of Change in Accounting Policy
In the present case as company changed its method of accounting from Straight line to Sum-of-years-of-digit method which is not disclosed by accountant in its books of accounts under notes to accounts. The company violated the interest of its stakeholders as this is material information and could affect the stakeholders’ decision making. This needs proper disclosure but accountant thought that the reason for change in method of depreciation will not create a good image in stakeholders’ mind that why she thought not to disclose the same in books of accounts which is a wrongful act. The company violated its ethical and governance responsibility and fines and penalty will be imposed on the company. Every company is liable to mandatorily follow its ethical and governance responsibilities and contravention to that will ruin the goodwill of the company. It is the social responsibility of the company to secure the interest of its stakeholders.
Stakeholders’ are the key to the success of every business. Company’s need to take care of their interest and they are also the keen users of financial information. Every major decision taken by the company are to be approved by the stakeholders’ in general meeting of the company as their approval and stake matters a lot in decision making (Burton & Jermakowicz, 2015). Any change in company’s method of accounting plays a major role in the financial statements and the resolution for such change needs to be passed in the annual general meeting of the company. Company’s accountant cannot make major changes in the methods of accounting within themselves (Bellandi, 2017). There is need to pass the resolution and take the opinion of stakeholders’ by conducting meetings.
In the present case as General Manager approached accountant to make changes in the method of charging depreciation without passing any resolution and informing stakeholders’ about such change is wrong as per company’s code of conduct. The procedure for such change is management needs to pass a special resolution for such change and then the resolution needs to be passed in annual general meeting of the company. If company wants to change the method of charging depreciation then they need to follow the procedure otherwise fines and penalties will be imposed. Stakeholders’ can call their investment and this will badly impact the share prices of the company as well as ruin the future investment perspective of the company. The company’s mischiefs will directly affect the company’s goodwill which will ultimately impact the stock prices of the company.
Conclusion:
The General Manager wants to change the method of charging depreciation so he did approached accountant for the same but the reason for change in method of charging depreciation is not valid in the context of company’s code of conduct as General Manager wants that company’s profit to be constant for coming years which is actually an act of falsification. The company cannot at any cost present a fake view of financial statements and violates the interest of its stakeholders’. If company wants to change its methods of accounting then there must be a valid reason for such change and with that change there needs to be benefit of the users of financial statements. The act of changing the method of depreciation just for the sake of constant profit and dose not disclosing this in the books of accounts of the company is in contravention to the company’s code of conduct and penalty and fines will be imposed on the company. The company needs to make proper disclosure in its books of accounts for any change in its method of accounting as per AASB116. If company fails to follow the guiding principles then fines and penalties will be imposed and company’s goodwill will get affected because of that. The company is also violating its ethics and governance by not disclosing the change in method of charging depreciation in its books of accounts. Manager’s and accountant’s act is in violation of company’s code and ethical practices.
References:
Beatty, A & Weber, J 2003 ‘The Effects of Debt Contracting on Voluntary Accounting Method Changes’ The Accounting Review: January 2003, Vol. 78, No. 1, pp. 119-142.
Bellandi, F 2017, Materiality in Financial Reporting: An Integrative Perspective, Emerald Group Publishing, UK.
Bragg, S. M. 2010, Wiley GAAP: Interpretation and Application of Generally Accepted Accounting Principles, John Wiley & Sons.
Burton, G. F. & Jermakowicz, E. K. 2015, International Financial Reporting Standards: A Framework Based Perspective, Routledge.
Gabriel, S. J. 2010, Financial Accounting, Tata McGraw-Hill Education.
Henderson, S, Pierson, G, Herbohn, K & Howieson, B 2015, Issues in Financial Accounting, Pearson Higher Education AU.
Keating, A. S. & Zimmerman, J. L. 1999, ‘Depreciation-policy changes: tax, earnings management, and investment opportunity incentives’, Journal of Accounting and Economics, vol. 28, no. 3, pp. 359-389.
Kiesko, D. E., Weygandt, J. J. & Warfield, T. D. 2010, Intermediate Accounting: IFRS Edition, Volume 2, John Wiley & Sons, USA.
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