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Impact on Financial Statements

Question:

Discus about the Impact of AASB 116 on Change in Methods of Depreciation and Policies.

The assignment focuses on the role of the accounting professionals based on the change in the method of depreciation that is done due to the challenges that business is facing in the current case. The company had a various type of challenges that they face due to the certain changes in the business environment of the company but such accounting policies can only be changed in the case it is in the scope of the standard that we need to follow in the day to day process that need to be followed by the customer.

There isn’t any requirement what is the meaning of the term depreciation, what is the impact of the same on the overall assets disclosed by the company in its financial statements Y-o-Y and how the same shall be taken to ascertain the useful life of the assets.There are instances wherein the role of the accountant is much more than just disclosing what should be the percentage of these and when to draw up a line to ensure that the disclosure is being made not only on a fair basis but also when there are cases wherein it is of an unusual nature, he correctly reports it as an extraordinary item and ensure there is no manipulation and inflation etc. (AASB 116 - Property, 2017)Accountant has to ensure that whenever there are cases of change in method of depreciation, it is within the parameters which allow it to happen and are being routed the usual process of approvals and disclosure because he is the person who vouches for the disclosed line items in the financials of the company. (Delloitte, 2016)

This is because, for instance, say the method of depreciation changes from SLM to sum of the digits method, it will result in higher profits being reported now onwards because till now, due to SLM method, almost double the depreciation was charged and income reported was less. Now when we change the same, it will result in lesser depreciation value and higher profits being reported. That’s why it should be validated, approved and at the most disclosed to the entire entity along with the stakeholders.(Carlin, 2016)

Before giving a response to his, the first step is to ensure who all are the persons to be included in the list of stakeholders and then see what will be the possible impact on the same due to change in method of accounting.Hence, stakeholders are people who belong to a substantially broader group, because they include any one having an interest in the success or failure of a business. This group can include shareholders, but goes well beyond shareholders to also include customers, communities, suppliers and partners, creditors and the government.

Apart from the regular meetings that we have, we even need to check that how are going to justify the same to the larger board, impact of the same on the financials and how do we sustain it for the going concern concept of the accounting standard.(ABC, 2016)

Stakeholder Management

Apart from the requirement to undertake the responsibility to update this to the leads, the other basic requirement is to ensure that these things are being sought after these stakeholders rather than just intimating them regarding the same.(Laing, 2016)

The Standard applies to annual reporting periods beginning on or after 1 July 2009 with early application of the Reduced Disclosure Requirements (RDR). It incorporates relevant amendments made up to and including 30 June 2010. RDR amendments cannot be applied to periods beginning before 1 July 2009.We should comply with the requirements of the standard before going away with the change in method, and when we actually undertake the same, we should check the effective date from which it is applicable, whether there was any valuation done by an independent valuer, what are the methods and significant assumptions, while estimating the items of fair valuation and we need to mention the extent to which these line items have an influence and valuation whether directly or indirectly. (Guide, 2016)

The Australian Accounting Board also pressurizes on how the valuation will be done for these line items and how the same shall be a part of the notes to accounts.

We should present to the board why did the transition/change happen from one method to another and how does it control the overall disclosure requirements of the standard.

Where all the lines have to be drawn by the presenters of the accounts and how are they disclosing these changes in method of depreciation.We need to check what all are the pending points to be monitored, what are the areas wherein we need to send up periodic reviews to the stakeholders and how do we justify the same to the group at large.(Hill, 2016) . More so, based upon the nature of the assets that meet the recognition criteria and are eligible for revaluation based upon the change in method of accounting, we shall take into account only those assets that may not have limited useful lives (for instance, when the entity adopts a bettered approach as they justify for it), and therefore may not be subject to depreciation. However, they would be subject to impairment testing when there is an indication of impairment.(Accounting for subsequent expenditure on PPE, 2014). As per the standard, we have come across that whenever there is an allowance to change the method of depreciation, it cannot be done more than once and that too it should comply with the requirements mentioned therein as well.

When coming up with a change in method of accounting, we need to check that how do we justify the change, what led to the changes, the impact of the same, how to disclose the same to the stakeholders, what made to happen those changes, and what will be the impact of the same.

When we present the notes to accounts to the stakeholders, we shall be able to present the same in a workable model and share what shall be the assumptions baselined to arrive with this method, assets that meet the recognition criteria and are eligible for revaluation based upon the change in method of accounting, and then we need to send up periodic reviews to the stakeholders and how do we justify the same to the group at large. These group always thinks that the results published to the public at large are being checked and prepared with the current scenario. (Gov.in, 2017)

Compliance with Accounting Standards

Cases wherein the company changes the method of depreciation, governance clauses specify that it should be disclosed by the company in its financial statements Y-o-Y and how the same shall be taken to ascertain the useful life of the assets and what will be the hit on the margins.

When the entity witnesses the change, it is much more than just disclosing what should be the percentage of these and when to draw up a line to ensure that the disclosure is being made on a fair basis plus ensure that there are no cases wherein it is of an unusual nature, the entity correctly reports it as an extraordinary item and ensure there is no manipulation and inflation etc. to the stakeholders at large. (Amortisation, 2014)

In cases of change in method of depreciation, ethics require to check that this change is within the parameters which allow it to happen and are being routed the usual process of approvals and disclosure because we should have a mechanism to vouch for the disclosed line items in the financials of the company.

Because the value of depreciation considered by one method of depreciation, say for instance, change from SLM to sum of the digits method, it will result in higher profits being because due to SLM method, almost double the depreciation was charged and income reported was less. And in case of sum of digits method, it is aggressive and hence we end up taking more revenue as compared to the previous years. That’s why it should be validated, approved and at the most disclosed to the entire entity along with the stakeholders. (A guide for asset and maintenance managers, 2016)

  • We recommend that when as a company policy, there is a change in the method of depreciation, it should have an impact from top to bottom and the discussion for the same should flow from bottom to top level.
  • While presenting the financials to the stakeholders, the first thing to do is to comply ethically and legally and present all the numbers as it is.
  • In this case, when Kam asked Maria to propose a method to sustain the profits of coming years over future years, rather than coming up with an option to change the method of depreciation and decide not to disclose the same to the people at large, Maria would have discussed openly and shared that disclosure of correct set of information is the basic requirement set and this has to come up right from the top management.
  • Staggering of profits is something which should not be as a part of daily practice and rather than that we should ensure and take up measures that help us not only in coming up with better approaches to sustain and survive but also help us in making up with the expectations set up by the stakeholders and the shareholders.(Equipment, 2016)
  • It is a primary requirement to ensure that this change is within the parameters which allow it to happen and are being routed the usual process of approvals and we should even undertake the disclosure because we should have a mechanism to vouch for the disclosed line items in the financials of the company.

We understand we should take steps which does not allow us to violate the standards and any such changes leading to issues in the overall accounting principles of the company as a well and help to improve the ethical environment of the company on an overall level.

Conclusion

It can be said the company in the given case had tried to change the polices without proper allocation of the same with the AASB 116 with the motive to evade the revenue and impact the profits as well. It can be said that it is against the best practices that the company needs to follow and hence incorrect presentation of the statements to the public at large.

These roles needs to be checked by the accountant and helps them to focus on the same and follow the standard before making any such decisions.

A guide for asset and maintenance managers. (2016). Department of Housing and Public Works, 1-5.

AASB 116 - Property, P. a.-J. (2017). Reasons for Issuing AASB 116. Federal Register of Legislation, 1-1.

ABC. (2016). Property, Plant and Equipment - Procedures. University Of Queensland, 1-4.

Accounting for subsequent expenditure on PPE. (2014). Australia Government Department Office, 11-7.

Amortisation, N. 5.–D. (2014). NCAP 5 – Depreciation and Amortisation . December 2014: State Of Queensland China .

Carlin, T. M. (2016). The Insider Trading Implications of Directors Loans. JOURNAL OF LAW and Financials Management, 1-10.

Delloitte. (2016). Valuing agricultural assets. USA: Delloitte Publishng House.

Equipment, I. 1. (2016). IASB APPLICATION DATE. Asutralia: CPA Austlaia.

Gov.in, A. (2017, 5 12). AASB 116. Retrieved from AASB.GOV.AU: https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun09_07-09.pdf

Guide, R. M. (2016). Accounting for subsequent expenditure on PPE. Finance Gov In, 1-10.

Hill, M. (2016). Revaluations and impairment testing of non current assets. LearnLIne EDU, 1-1.

Laing, G. K. (2016). Deconstructing an accounting paradigm. 2015, 509-512.

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