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Sunshine Limited's Depreciation Method

Question:

Discuss about the Compiled Property Plant and Equipment.

Sunshine Limited is a large department store  and was using straight line depreciation from the first since the company was formed. It is seen that for the year ended 2015 he anticipated that the profits will go higher and higher in 2016 and 2017 and then the researchers predicted that the profits will be lowered down in 2018 and 2019.By looking in to the research the manager thought that he could lower down the profits of 2016 and 2017 and transfer in to 2018 and 2019 when profits will be lowered down. He then went to the constant and discussed the matter and told her to do something so that he can implement his idea in t the financial statements. He is doing so because he wants to maintain consistency which would be missing if he wouldn’t have implemented his idea as the profits was getting lowered down in 2017 and 2018. He wanted to keep his shareholders happy to keep consistently profits. The accountant did not find the advice justified but he would need to do that as she thought her contract with the company won’t get renewed if he would upset the general manager. After lots of permutation and combination she then decided to adopt the change of depreciation from straight line depreciation to sum of digits method.. The accountant Maria did not reveal this change in the records to the financial statements as she thought  that the purpose given by Kim would leave a very bad impression about the company .

Depreciation is the method by which the cost of the asset that is tangible is allocated over its useful life. For tax determinations, trades can deduct the price of the touchable assets they acquisition as expenses of the business; Infect, trades must denigrate these assets in accordance to the rule specified.For charging depreciation ,the asset should be put to use rather just installation of asset. In other arguments it can be said that when it is in the site and condition essential for it to be skillful of operative in the method intended by entity. The asset when held for sale can’t be denigrated. When there is no production then the depreciation charge can be zero. The suitable life of an asset is well-defined in terms of the asset’s anticipated utility to the entity. The advantageous life of the asset can be smaller to it financial life. It is also known that the methods of depreciation should be assessed each year and any alteration should be accounted properl

This is the most easiest form of scheming depreciation. It is intended  by taking the cost of the asset minus any residual value divide by the useful life. The quanity of depreciation will be the same through the useful life.

Double declining method

When consuming the double-declining-balance method, the recover worth is not measured in important the annual deflation, but the asset book value being degraded is never approved below its salvage value, irrespective of the technique that is being used

Changing the Depreciation Method

Sum-of-the-years'-digits is an accelerated method for calculating an asset's depreciation. This method takes in to consideration asset's predictable life and it sums up the all the digits of the life together., So if the asset was expected to last for three years, The digits would be obtained by adding: 3 + 2 + 1 to get a total of 6 .The accountant is considering this method as it is said to be one of the most enhanced and fast-tracked method of depreciation as it takes more depreciation in the starting years and then it lowers down

In this  case  , the profits were going to be lowered down for the year ended 2018 and 2019  so the manager wanted to transfer profits . It is not an  ethical way to reduce the profits in the current year and transfer them. The period revenue should be allocated to the period neither it should be transferred or reduce it. It is a wrong adjustment that will be made in the financials. The accountant tend to change the depreciation method  and was not wanting to disclose in the financial statement which is unethical and not accepted (Maxwell, 2017)

AASB 116 contracts with property plant and Equipment

This Standard shall be applied in accounting for property, plant and equipment except when extra Standard needs or licenses a dissimilar secretarial action.

  • Any plant property and equipment held in the initiative for any type of sale.
  • Any organic asset in relation to agriculture .

In this case  by going with the provisions of AASB 16, the standard

  • recommends necessities for acknowledgement, dimension at recognition, measurement after appreciation, and DE recognition of possessions, plant and equipment assets

The aim of this Standard is to recommend the accounting action for property, plant and equipment so that the financial statement users can discern evidence about an entity’s speculation in its property, plant and equipment with the changes in the investment they had made.  The main matters in accounting for property, plant and equipment are the acknowledgement of the assets, the fortitude of their carrying amounts and the devaluation charges with the impairment loses or gains related to them

The depreciation technique used shall replicate the design in which the asset’s upcoming financial benefits are likely to be expended by the enterprise.

The depreciation method that is been applied to and asset shall be checked and properly scrutinized by the assesse or the company at the end of each annual reporting period and any change in the consumption of the benefits arising in the future, the technique shall be altered to reflect the transformed pattern.  Such an alteration shall be taken in to consideration for as a change in an secretarial estimate in respect to provision  with AASB 108. A  variety of methods can be used to calculate the depreciable amount over the useful life. It includes the straight line method, the diminishing method. The entity adopts the technique that most carefully reflects the predictable pattern of consumption of the future fiscal assistances personified in the investment in the asset. The depreciable amount is calculated after deducting the residual value         

Change in depreciation method is not a change in accounting policy instead it’s a change in accounting estimate with the change in accounting principle.

Proper disclosures need to give in the notes of financial states regarding the change in

  • the accounting method of depreciation , with the reasons of change with the difference in the amount of depreciation as compared to the previous year and also any type of deviation notified.
  • the quantity of the change relating to periods earlier those obtainable, to the amount practicable
  • if reconsidering submission is unviable, an clarification and explanation of how the change in secretarial strategy was functional (Compiled ASSB , 2017)

Depreciation method change is the change in the accounting estimate

The effect of the change in the estimate shall be properly put in to the financial statements and prospectively by including in profit or loss.

We see that the  change in the estimate will actuary change both asset and liabilities.

  • Any disclosure which relates to the current period and also expected to give benefits in future periods need to be disclosed as per relevant provisions. With the nature and the amount of the change needs to be disclosed
  • Also if the amount of the effect in the period in the future is not disclosed because estimation is not practicable the entity should also disclose the fact.
  • The financial declarations should reveal the depreciation approaches used , the useful life of the asset and the measurement bases used for the gross carrying amount., any asset which is bought for selling  and also the depreciation amount . Any alteration in technique of depreciation shall also be comprised in the tax audit report concerning why the change has occurred and also the amount of alteration with any details of nonconformity.

The accountant is wrong in not disclosing the appropriate disclosures as she is responsible to disclose it according to the Standards of auditing.

amount of the effecamot in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact mount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact

However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities ever, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities.

References

Federal register (2017).AASB 116- Property plant and equipment. [online] Available at: https://www.legislation.gov.au/Details/F2005B00678 [Accessed  9th April. 2017].

Internet (2017)Sum of digits[online] Available at: https://interunet.com/sum-years%E2%80%99-digits-depreciation-advantages-disadvantages [Accessed  9th April. 2017].

Asset accounting (2017).AASB 116- Property plant and equipment. [online] Available at: https://www.sace.sa.edu.au/documents/652891/e3c3644b-109e-404a-af87-2a114bb6651e [Accessed  9th April. 2017].

Maxwell ,AB (2017).AASB 116- Property plant and equipment. [online] Available at: https://www.coalface.com.au/PDFs/AASB116.pdf [Accessed  9th April. 2017].[4]

Factsheet (2017).AASB 116- Property plant and equipment. [online] Available at: https://www.johnwiley.com.au/highered/aas2e/content029/fact_sheets/AASB116_ch10.pdf [Accessed  9th April. 2017]

Compiled AASB (2017).AASB 116- Property plant and equipment. [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf [Accessed  9th April. 2017]

Accounting explanation (2017).AASB 116- Sum of digits method. [online] Available at: https://www.accountingexplanation.com/sum_of_the_years_digits_method_of_depreciation.htm [Accessed  9th April. 2017]

Cite This Work

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[Accessed 25 February 2024].

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