Financial Accounting In The Banking Industry Is Crucial For Accurate Financial Reporting.

Ethics and Governance

Discuss about Financial accounting in the banking industry.

The current report aims to focus on Sunshine Limited, in which the accountant of the firm, Maria Mars was approached on the part of Kam Sunshine, the general manager. The person wanted to change the method in relation to income in a discrete fashion. As a result, Maria Mars has been in dilemma, since she was worried about renewing her terms with the company. Even though such actions are not ethical, the straight-line method of depreciation has been changed to sum-of-years-digits method (SYD). Thus, the stakeholders identified from the case study comprise of communities, shareholders, customers, governments, suppliers, partners, creditors, general manager and accountant. The ethical issues in relation to Maria have been described and the major norms violated on the part of the organisation comprise of lack of integrity, transparency and objectivity. Finally, the role of Maria to change the method of depreciation is described with adherence to the requirements of the organisation and the effect of AASB 116.

In the words of Ball, Grubnic and Birchall (2014), morality has strong relationship with governance and ethics and thus, it could not be imposed. However, the above-depicted ethics is suitable, since both quality and work level would be improved, which would further increase the overall confidence of the users. The governance and ethics-related problems of Sunshine Limited are depicted as follows: 

In order to make personal gains, Kam Sunshine has deceived the higher-level management of Sunshine Limited and the person has obtained support from the accountant to accomplish his gains. The company has utilised various depreciation methods on non-current assets for representing the deflation effect and the depreciation method could signify the condition where the benefits related to future assets are estimated to be obtained (Beatty and Liao, 2014). The overall depreciation method has changed, which would lead to variance in timing of depreciation. As a result, the actual decisions might influence the decisions of the shareholders due to error estimates. The accountant has the responsibility to depict accounting information effectively and disclosure of changes in financial statements would be revealed. This contradicts the work ethics of the accountant and it has breached the doctrine of objectivity.

It is the right of the shareholders to obtain an overview of how profitable their investments would be in the organisation. Depending on the variation pertaining to profitability in their investments, the shareholders have the obligation to determine whether to retain the company shares (Bebbington, Unerman and O'Dwyer, 2014). For meeting the expectations of the shareholders of Sunshine Limited, Kam Sunshine has hidden the matter of change in depreciation method in order to form illusion of uniform higher profit. Hence, Sunshine Limited lacks integrity and lucidity for signifying rightful information to the users of financial reports. 

Role of Accountants in Changing Depreciation Methods

The given case study clearly inherits that the accountant of Sunshine Limited has changed the depreciation method from straight-line method to SYD method. The motive of adopting the latter method is to reduce the profit level in the next two years in order to transfer the same 2018 and 2019 for guarding against the expected economic downturn. This could be described with the help of the below-stated instance:

Asset cost = $500,000

Useful finite life = 5 years

Salvage value = $50,000

Now, the difference between profits using the two depreciation methods is illustrated briefly as follows:

Straight-line depreciation = (Asset cost - Salvage value)/ Useful finite life

Straight-line depreciation = ($500,000 - $50,000)/5 = $90,000

Sum-of-years-digits depreciation method:

Sum-of-years-digits = Depreciable base x (Remaining useful finite life/ Sum-of-years-digits)

Sum-of-years-digits = n (n+1)/2

Sum-of-years-digits = 5 (5+1)/2

Sum-of-years-digits = 15 

After modifying the depreciation method, the depreciation amount would rise in the opening years; however, the trend would be falling in the upcoming years (Brown, 2014). This would enable in keeping the consistency of profits because of the reduction in depreciation expenses over the periods. Thus, the accountant of the organisation has carried out its role of changing the depreciation method for fulfilling the goals of the general manager of the organisation, Kam Sunshine.

As laid out by Bushman (2014), a stakeholder could be a group, an individual or organisation having interest in another organisation. The main stakeholders identified in case of Sunshine Limited comprise of the following:

The external stakeholders include the communities and government, since their association is close with the organisation. Since the organisation operates within the communities, the customers are not the only stakeholder to be affected. Even though they pay taxes, the residents are expected informally to act in an ethical manner along with maintaining environmental sustainability (Collier, 2015). Along with this, the communities expect the firms to be involved with local charitable gifts and events. The governmental organisations make decisions and such decisions could influence the overall business operations. Thus, hence it is expected from the managers of the organisation to maintain strong relationships with the local officials in order to project regulatory changes or development of community influencing business operations.

The immediate external stakeholder comprises of the customers, which is the most profitable for Sunshine Limited. For retailers, consumers and customers are identical terms. Hence, attracting, retaining and creating loyalty from the core consumers assures long-term financial progress of a firm (Henderson et al. 2015). For business-to-business organisations, business firms comprise of the customers and the products or services are exchanged for business use. There is direct selling of trade resellers to the wholesalers or retailers; however, the end customers are to be considered as stakeholders as well. For example, the distribution channel would not succeed, if the customers do not purchase the final goods manufactured.

Stakeholders

The suppliers and business partners are the crucial stakeholders in the existing competitive world. The firms often tend to create loyal association with their suppliers and associates. This would enable Sunshine Limited to establish common goals, combined vision and strategies. The trade buyers and sellers could work in partnership effectively to provide maximum value to the customers, which would be beneficial for all the partners (Gitman, Juchau and Flanagan, 2015). Along with this, it is expected from the trade partners to act ethically in order to avoid hampering the customer reputation of the firm related to Sunshine Limited.

As pointed out by Hoyle, Schaefer and Doupnik (2015), the companies often look for lenders in order to finance business ventures, supply purchases and asset purchases. The banks are granting loans for main purchases such as new building. The suppliers would be able to give product inventory on account that an organisation incurs in future. The current creditors of Sunshine Limited would expect the consistent meeting of deadlines, which would help the company in enhancing relationships with the creditors and this, in turn, would raise the profit margin of accumulating quality funding in future.

Based on the case study, it is observed that Maria Mars is the accountant of Sunshine Limited and the accountant has prepared the financial reports by switching the profit margin of 2016 and 2017 to the next two years respectively.

The provided case study clearly depicts that the general manager of Sunshine Limited is Maria Mars and the person is responsible to make decisions in order to enhance the overall performance of the organisation.

The individuals investing in Sunshine Limited in order to reap the benefits by obtaining a part of the net income are classified as the main stakeholders of the firm.

As identified from the case study, Kam Sunshine has asked Maria Mars in devising a way to minimise the profits in the next two years starting from 2016 onwards. Hence, it would fetch unswerving profits for benefitting the shareholders in the next two years (Hribar, Kravet and Wilson, 2014). Maria has changed the depreciation method eventually from straight-line to SYD method and she did not reveal such modification made in the annual report of the organisation.

The compiled standard, “AASB 116 associated with property, plant and equipment” is applicable to annual reporting periods initiating on or after 1^st July 2009. This standard aims to describe the accounting treatment associated with property, plant and equipment in order to discern information to the users of the financial reports. This is associated with the investment of the organisation on these assets and the modifications made in such investment (Li, 2015). The main issues associated with accounting in relation to property, plant and equipment are the asset realisation, carrying amount ascertainment, depreciation changes and the losses of impairment to be recognised in relation to them.

According to the provided case, the depreciation method has changed from straight-line to SYD. The concept of the method of depreciation is distribution the tangible asset cost over the useful finite life of that asset (Macve, 2015). It is observed that the organisations are involved to depreciate non-current or fixed assets for accounting as well as purposes related to tax. The former has an influence on the reported net income of the firm, while the financial position might be influenced on the part of the former. Initially, the cost apportionment is made as depreciation expenditure in the period, in which the asset could be utilised (Pratt, 2016).

The business firms often recognise this expense for financial reporting and tax purposes. The ways of computing depreciation and the years over which the depreciation of assets would be carried out, might deviate between the kinds of assets within the same business and modification for tax-related purposes (Smith, 2017). The accounting laws or standards need to specify the same, since they vary from country to country. There are various methods of computing depreciation expense like straight-line, sum-of-years-digits and declining balance methods. The introduction of depreciation expenditure is evident when the asset is placed in service.

In the words of Warren and Jones (2018), the SYD method is a rapid process of computing the asset depreciation. The formula for calculating the overall depreciation value under this method is represented as follows:

Sum-of-years-digits depreciation = Depreciable base x (Remaining useful finite life/ SYD method)

This method is formed for signifying the consumption of the major asset. Moreover, it is utilised when any particular pattern to the method is not present, in which the asset is to be used over the years. The straight-line depreciation method incurs expenses in a uniform fashion over the useful finite life on fixed assets (Weygandt, Kimmel and Kieso, 2015). This depreciation method is suitable where the economic recognition where the economic recognition from an asset is estimated to be realised over the lives in an uniform manner.

Depreciation per annum = (Cost - Residual value)/ Useful finite life

The case study states that Sunshine Limited is a large departmental store and the top-level members of the organisation take decisions in combination based on regulations during its establishment. Due to this, Kam Sunshine has breached the policy of the organisation by making self-decisions, and the financial statements of the organisation are affected directly due to this. In addition, in this case, in which the changes to the organisation were conducted, the ultimate decision is required to be revealed to all the stakeholders related to the organisation. Therefore, it could be inferred that the change of depreciation method enforced on the part of Maria Mars has not adhered to the AASB 116 requirements.

Conclusion:

The above evaluation clearly states that the managerial actions towards approaching an employee and making recommendations in changing the depreciation method would have considerable effect on code of conduct and ethics within the firm. However, the accountant of the organisation has undertaken such actions because she might not be able to renew her contract and she might receive negative feedback in order to behave against the managerial orders. It is found out that constant profits would be maintained with the change in the method of depreciation because of reduction in depreciation expenses over the periods. However, this does not adhere to AASB 116, since the accountant has not revealed such method change in the financial reports of Sunshine Limited. 

References:

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