Accounting For Decision Making And Control -Myassignmenthelp.Com

Question: Discuss About The Accounting For Decision Making And Control? Answer: Introducation Sunshine Ltd, a department store, is using the method of straight-line for calculating deprecation since its establishment. However, the general manager of the company at present has asked the accountant of the company to incorporate the use of sum-of-years digits method in place of straight-line method for calculating deprecation. This is done in context of the economic slowdown expected by the company in the future years and thus such accounting change will help the company in delivering consistent profits to its stakeholders and thus achieving this satisfaction. However, such accounting practice of the company is unfair and unethical as it has decided to conceal this information from its stakeholders by not disclosing this change in the notes to financial statements. Deprecation is referred to a method adopted by a firm to calculate the financial value of an asset over its remaining useful life. The financial entry of the deprecation is reflected in debit column in the income statement. The charging of deprecation reduces an asset value by the calculated amount of depreciation that is subtracted from the asset costs in the balance sheet. Deprecation is calculated for an asset for providing information to the company about the remaining useful life of an asset so that it can prepare for its replacement in advance. The business companies incorporate the use of different methods for gaining knowledge about the deprecation of its assets. The IFRS (International Financial Reporting Standards) have not placed any mandatory instruction on the businesses for adopting any particular method for charging deprecation over assets. However, the business companies are required to maintain consistency in their financial reporting regarding the accounting methods used for preparation of the general purpose financial statements. The theory of conceptual framework of accounting developed by IFRS has stated that businesses need to maintain consistency during their financial reporting. In addition to this, the theory has also advocated that the businesses need to disclose all the materialistic information in its financial reports. The use of changed method of deprecation by Sunshine Ltd reflects the non-compliance of the company with the principles of conceptual accounting framework theory. The company is not maintaining consistency in its financial reports and is also concealing such information form its stakeholders and therefore its actions can be regarded to be unethical (Deegan, 2014). The straight-line method of calculating deprecation involves the deduction of a fixed amount as depreciation from the respective assets. However, the use of sum of year digit method for calculating depreciation results in charging the depreciation amount only in the first few years over the useful life of an asset. The method also involves charging deprecation on written down value of an asset that is the value remained of an asset after deducting depreciation from the its initial cost in a specific year. Therefore, the method of sum of year method results in accelerating the deprecation amount in the initial years and reducing it over the remaining life of an asset whereas straight-line method chares deprecation in an equal amount throughout an asset life. As such, the decision of the accounts to change the method of depreciation will impact the profitability position of the company and therefore need to be disclosed to its shareholders, investors and creditors. Thus, the decision o f the accountant in the present case to change the method of depreciation without informing the stakeholders is against the theory of corporate governance (Zimmerman and Yahya-Zadeh, 2011). The theory of corporate governance states that businesses need to develop a system of rules, practices and procedures for directing and controlling their overall operational activities and functions. This is essential for balancing the needs of the stakeholders with the business objectives. However, in the present case it can be stated that the company is acting unethical by not developing and implementing a proper corporate governance framework that would prevent the occurrence of unfair business practices. The business stehics is an integral aprt of the corporate governance framework that demands a business organization to act morally by securing the interests of its different stakeholder groups. The present decision of the company management to change the method of depreciation will manipulate its financial accounts and present false information to its shareholders about its financial performance. This is done by the company for ensuring its economic growth in the period of econom ic slowdown by adjusting against inflation that will depict its false financial picture to its shareholders and creditors. The shareholders of the company will be misleading by the consistent profitability depicted by the company during the period of economic slowdown also. The company is playing foul as analyzed form the case study by not communicating the accounting changes to the shareholders and only seeking to attain its business objectives (Ketz, 2006). Sunshine Limited has made two very major mistakes that have adversely impacted the business ethics and also have violated important principles of corporate governance. First mistake is that CEO of the company has forced the accountant to change the method of depreciation accounting in order to have consistency in profits over the future years. Second mistake is that accountant has influenced the investment decisions of the investors through not disclosing the change of method accounting and resultant change in profits due to such change. It will make believe shareholders that company is making good profits even in bad conditions through following the same method of depreciation as earlier. So it can be said that Sunshine Limited has contravened the stakeholders theory that clearly say that shareholders must be informed about any material change in the accounting policy. As per the convention of materiality while performing the financial reporting process, company is required to accou nt for and disclose all the material information in the annual report so that stakeholders can be informed about such change. Here is important to note that change in method of depreciation accounting is a material change as it has impacted the profits a lot, so it should be disclosed in the notes to financial statements (Jeffrey, 2016). The actions of the management at Sunshine Limited have impacted the decisions of two main stakeholders. These two stakeholders are creditors and shareholders of the company. Shareholders are those who invest money in form of capital and creditors are those who provide the funds to the company in form of debts. It is true that both creditors and shareholders depend upon the annual report before they make their decisions. The unethical action of the management at Sunshine Limited has impacted the trust of both the stakeholders that they perceive in the annual report and corporate governance practices of the company (Adams, 2002). The accountant role in preparing the financial statement is vey important in providing proper justification and disclosure of all the material changes in the financial statements due to decision made by the management. In this case accountant has failed to comprehend the same by not disclosing the change in method of accounting and resultant change in profits. So it can be said that accountant has not performed his duties in accordance to the ethical practices of public accountant and is acting against the professional guidelines provided to the accountants. The provisions described in AASB 116 have been disregarded while drafting the annual report and also the provisions provided in AASB 101 has not complied with. AASB 101 deals with the presentation of the financial statements and it provides that any material change in accounting method and reason for change must be disclosed in the financial statements. CEO of the company has been forced to change the method of depreciation witho ut proper reason and same has not been shown in the financial statements (AASB 116, 2017). Key Findings It has been found through overall evaluation of given case regarding the change of depreciation method by the Sunshine Limited that management has unethically manipulate the decision or perception of the shareholders and creditors through changing the amount of profit shown in the income statement. The accountant of the Sunshine Limited has also not disclosed the change of the method of depreciation in the notes to financial statements that has violates the most important provision of the AASB 116. The change of method of method of depreciation without proper reason and also not disclosing the same in the notes to account is totally unacceptable under the principle of business ethics and also it contravene the accounting standards related to the change of method of depreciation and disclosure of same. The accounting standards provided in IFRS and Australian Accounting Standard 101 requires companies to disclose the information regarding any material change in the accounting policies and reasons for such change in the notes to financial statements. So it can be said the Sunshine Limited has disregard the provisions of the AASB 101 as no such disclosure has been made by the company in their annual report that make shareholders unaware about the change in accounting policies and resultant decrease in profits through such change. The actions of the management at Sunshine Limited are clearly against the corporate governance principles (Blake, and Gowthorpe, 2005). Recommendations As the management has already decided to change the method of depreciation without proper reason, so it is advised to the accountant to first disclose the change in the method of depreciation in the notes to financial statements. Also, a detailed report on the change in method of depreciation and resultant change in profits must be communicated to the auditors of the company so that a suitable justification can be provided in the annual report and investors can be aware about such change. Informing auditors about such change will help the accountant to find the appropriate solution to this issue (Cascarino, 2012). As the audit committee if the integral part of the corporate governance and they have power to change back the method of depreciation back to straight line and find the best solution to the current issue. There can be another solution to this problem by providing the reasoned justifications that change in the method depreciation to sum of years digit method will help the co mpany to maximise the profits in year 2018 and 2019. In addition to this, accountant must comply with the provisions of AASB 101 and AASB 116 in order to such change (Drury, 2005). Conclusion The overall analysis clearly indicates that Sunshine Limited has performed unethically and also breaks the principle of corporate governance by changing the method of deprecation and not disclosing the same in notes to account. The most important principle of the corporate governance is that company must strictly follows the accounting standards while performing the process of financial reporting and it has been found that Sunshine Limited has not complied with this corporate governance principle. Some recommendations has been provided to the Sunshine Limited to rectify the mistake. References AASB 116. 2017. [Online]. Available at: https://www.johnwiley.com.au/highered/aas2e/content029/fact_sheets/AASB116_ch10.pdf [Accessed on: 18 January 2018]. Adams, C.A. 2002. Internal organisational factors influencing corporate social and ethical reporting: Beyond current theorizing. Accounting, Auditing Accountability Journal, 15(2). pp. 223-250. Blake, J. and Gowthorpe, C. 2005. Ethical Issues in Accounting. Routledge. Cascarino, R.E. 2012. Corporate Fraud and Internal Control: A Framework for Prevention. John Wiley Sons. Deegan, C. 2014. Financial Accounting Theory. McGraw-Hill Education Australia. Drury, C. 2005. Management Accounting for Business. Cengage Learning EMEA. Jeffrey, C. 2016. Research on Professional Responsibility and Ethics in Accounting. Emerald Group Publishing. Ketz, E.J. 2006. Accounting Ethics: Theories of accounting ethics and their dissemination. Taylor Francis. Petra?cua, D. and Tieanub, A. 2014. The Role of Internal auditing in Fraud Prevention and Detection. Procedia Economics and Finance 16, pp. 489 497. Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control.Issues in Accounting Education,26(1), pp.258-259.