Discuss about the Ethics & Governance Accountantants Role In Changing Depreciation Methods, Stakeholders And The Impact Of AASB116.
Each company uses a different method of depreciation and it all depends upon the estimates, judgements and the policy of the company. But then the accounting policy must be applied throughout the years.
All the employees face some or the other conflict in their workplace but then the same has to be resolved on an early basis since working unethically would not be right for the company. Each method of depreciation has its own set of advantages and disadvantage and they result in different amounts of the profits.
The adoption of any specific method of deprecation fails to effect the amount of the expense of the depreciation which has been charged in each one of the year during the life of an asset. The following is the diagram which shows the different methods of the depreciation on the basis of a yearly expense:
The above drawn diagram is based on the following data:
Cost of fixed asset
Total Machine hours
(for calculating depreciation using units of activity method)
Rate of depreciation
(for calculating depreciation using reducing balance method)
In terms of the straight line method of depreciation, the computations are easy when it comes to calculation. It is very useful when there is a pattern of the economic benefits which is very hard when it comes to the determination of the amounts with precision. Also, this method is very much suitable when it comes to providing the similar level of the economic benefits over the useful life of the asset. The major disadvantage of this method is the fact that fails to show the pattern of the economic benefits of an asset (Accounting simplified, 2017).
Further, the following are the advantages of using the straight line depreciation method:
- This is one of the simplest methods when it comes to providing the depreciation. This could easily be understood even by an ordinary person. The calculation of the deprecation is as per this method and hence, very easily understood.
- As per this method, the asset could be written off to even 0. This is the depreciation method which helps in the calculation of the expense of depreciation on the basis of the original cost of the asset at the specific rate and hence, the value of that asset is completely written off during the life of the asset (Profit books, 2017).
- The amount of depreciation an easily be known when we multiply the amount of the depreciation expense with the number of years
- This method is very easy when it comes for smaller firms
- It is very much suitable for the firms when it comes to a large number of old and new machines
- It is very much useful for the assets that are of a lesser value
The following are the disadvantages of this method:
- There is an undue pressure on the final years of the life of the machine
- There is as such no provision of replacement
- There is a loss of an interest which is not invested outside the frim and hence, no interest has been received
- This method is very illogical when it comes to the charging of depreciation
- It not suitable for the assets that have a longer value and are expensive.
The use of the sum of the year’s digits is the method which helps in the calculation of an annual depreciation by the way of calculating the depreciation rate by the way of adding up the digits for each one of the year over the life of an asset.
This is the method which is suitable for the assets that entails lesser amounts of the expenses on the repairs and the maintenance. This is the method which is useful for the firms that are engaged in the business of manufacturing and that have a larger number of machines. Some of the assets are old and some of them are fresh. The combined result of the depreciation if the old and the new machines and also of the repairs and the maintenance which charges the balance each other.
The advantage of this method is the fact that it accelerates the amount of the depreciation and also, that the accelerated depreciation leads to the reduction of the taxable income and also of the taxes that the company owed during these years. The main disadvantage of this method is the fact that the calculation involved is very complex in nature (Accounting, 2017).The stated has the advantages of matching up the costs with the revenues in the most efficient manner, accurate reflection of the usages of the assets over their useful lives.
The disadvantages include the fact that it is very confusing in nature and it has the declining amounts and declining amounts of depreciation expense usually offsets by increasing the maintenance expense which might smooth the income over the years (Interunet, 2017).
An entity would be able change its policy of accounting in case, the same is required by the IFRS or if the change in the policy of accounting rusts in the financial statements in providing some of the reliable and an increased information which results in better presentation of the financial transactions or the events and other such conditions on the financial position and the financial performance and the cash flows of the company (Basic college accounting, 2017).
The departmental store has been using the straight line method of depreciation but now, the accountant is told to use the sum of year’s digits and not disclose the same in the books of accounts. The accounting standard specifically requires that no change in the accounting policy is allowed to be made unless and until the same is required by the relevant accounting standards or unless and until the same is helps in presentation of the financial statements in a better manner. Hence, the company sunshine ltd cannot change the stated method of depreciation (IFRS, 2017).
Further, even if the company changes the accounting policy, then it has to disclose the same in the notes to the financial statements and also disclose the reason as to why the same has been done.
Though the accounting standard does not lay down the depreciation method which could be used by the company but lays down the fact that the method of depreciation which indicates the fair presentation of the financial statements is always preferred.
Even if Maria is being asked to manipulate the revenue of the company, then also, she must not go for it since it is very much against the ethics of the company.
If she is being asked for the same, then the following could be done:
- The code of ethics that have been laid done by the company must be read properly so that the formal guidance could be obtained from the same. This is done for solving the dilemma immediately and this depends on the way in which the ethics statement must be adhered to. The code of the ethics would be able to provide a backdrop on which the pros and the cons of the decision of the business could be laid down and also that would give in a very clear picture of which decision is in more line with the financial statements of the company.
- The dilemma must be shared with the supervisor so that and advantage could be taken of the same. The supervisors must be consulted so that the employees could be kept out of trouble when it comes to the resolving of the conflicts.
- The ethical issues must be discussed with the employee of the human resources and also with the other executives.
- The ethical issue must also be discussed with the peers and the colleagues from the other companies in case that employee is allowed to divulge the secrets of the company.
- The past news must be read thoroughly so that in case, this has been done in the past, then what were the actions that were taken and if not, then could the same be avoided (Small business chron, 2017).
Hence, in the nutshell, though the accounting standard does not lay down any specific depreciation method which the company is duty bound to follow but jus states that the accounting policy must be applied consistently in each year and even if it is changed, it must be required as per the relevant accounting standard or as per the new notification which has been issued or if the same results in a better and fair representation of the financial statements. And if the company changes the accounting policy, then it has to report the reason for the same and also the stated fact. The manipulation of the profit amount in the books of accounts is unethical and in no circumstance should the employee go for the same but if she is being asked by her supervisors for the same, then she should go to the higher authorities and contact the human resource department so that the ethical issue could be resolved.
Accounting-simplified.com. (2017). Methods of Depreciation | Accounting-Simplified.com. [online] Available at: https://accounting-simplified.com/financial/fixed-assets/depreciation-methods/types.html [Accessed 17 May 2017].
Accounts-assignment.com. (2017). Advantages and disadvantages of Straight Line Methods - Accounts Assignment. [online] Available at: https://www.accounts-assignment.com/advantages-and-disadvantages-of-straight-line-methods [Accessed 17 May 2017].
Basiccollegeaccounting.com. (2017). Explain the advantages and disadvantages of using the Straight line, fixed or equal instalment method of depreciation of fixed assets - College Accounting Coach | College Accounting Coach. [online] Available at: https://basiccollegeaccounting.com/2011/03/explain-the-advantages-and-disadvantages-of-using-the-straight-line-fixed-or-equal-instalment-method-of-depreciation-of-fixed-assets/ [Accessed 17 May 2017].
Interunet.com. (2017). Sum years’ digits depreciation - advantages, disadvantages | interunet. [online] Available at: https://interunet.com/sum-years%E2%80%99-digits-depreciation-advantages-disadvantages [Accessed 17 May 2017].
ProfitBooks.net. (2017). What Is Depreciation - Types, Formula & Calculation Methods For Small Businesses Accounting. [online] Available at: https://www.profitbooks.net/what-is-depreciation/ [Accessed 17 May 2017].
Smallbusiness.chron.com. (2017). How to Resolve Ethical Dilemmas in the Workplace. [online] Available at: https://smallbusiness.chron.com/resolve-ethical-dilemmas-workplace-11008.html [Accessed 17 May 2017].
www.ifrs.org. (2017). IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. [online] Available at: https://www.ifrs.org/Documents/IAS8.pdf [Accessed 17 May 2017].
To export a reference to this article please select a referencing stye below:
My Assignment Help. (2018). Ethics & Governance Essay: Accountants' Role In Changing Depreciation Methods, Stakeholders & AASB116 Impact.. Retrieved from https://myassignmenthelp.com/free-samples/ethics-governance-accountantants-role.
"Ethics & Governance Essay: Accountants' Role In Changing Depreciation Methods, Stakeholders & AASB116 Impact.." My Assignment Help, 2018, https://myassignmenthelp.com/free-samples/ethics-governance-accountantants-role.
My Assignment Help (2018) Ethics & Governance Essay: Accountants' Role In Changing Depreciation Methods, Stakeholders & AASB116 Impact. [Online]. Available from: https://myassignmenthelp.com/free-samples/ethics-governance-accountantants-role
[Accessed 05 March 2024].
My Assignment Help. 'Ethics & Governance Essay: Accountants' Role In Changing Depreciation Methods, Stakeholders & AASB116 Impact.' (My Assignment Help, 2018) <https://myassignmenthelp.com/free-samples/ethics-governance-accountantants-role> accessed 05 March 2024.
My Assignment Help. Ethics & Governance Essay: Accountants' Role In Changing Depreciation Methods, Stakeholders & AASB116 Impact. [Internet]. My Assignment Help. 2018 [cited 05 March 2024]. Available from: https://myassignmenthelp.com/free-samples/ethics-governance-accountantants-role.