Changing Depreciation Methods and Compliance with IAS 16 or IASB 116

This case study discusses Marion's decision to change the depreciation method of Pringles Ltd without proper disclosure, violating IAS 16 and AASB 116. The importance of disclosing such changes in financial statements is highlighted.

Changing depreciation methods
1

Contents
D. Do Marion’s actions comply with the requirements of IAS 16 or IASB 116?.....................................2
References.............................................................................................................................................4
2

D. Do Marion’s actions comply with the requirements of IAS 16 or
IASB 116?
IAS 16 and AASB 116 both accounting standards relate to the property, plant and equipment
and their accounting treatment and reporting mechanism in the financial statements of a
company. In accordance with the provisi0ns of these standards whenever a company changes
its method of depreciation, it is mandatory to disclose such change in the notes to financial
statements of the company. As per paragraph 73 of IAS 16 for each class of property, plant
and equipment a company is required to disclose the depreciation method used useful lives of
assets and the rates of depreciation charged and accumulated depreciation in the financial
statements of company. As per paragraph 61 of IAS 16, the depreciation method used by the
company shall be reviewed annually and the change in method shall be reported as the
change in estimate under IAS 8 in the notes to financial statements of company. Also as per
paragraph 61 of AASB 116, at each annual reporting period of the company, the depreciation
method used for fixed assets shall be reviewed and any change in the method of charging
depreciation shall be disclosed in the notes to financial statements of company as a change in
accounting estimate in accordance with AASB 108 (Laing & Perrin, 2014).
In the case of Pringles Ltd, the company has been charging depreciation on its assets as per
straight line method of charging depreciation since the formation of company. The company
is likely to earn high profits in the year 2016 and 2017 but the economist predict that the
profits of the company are likely to decline in the year 2018 and 2019. Therefore, in order to
maintain the uniformity in profits for the coming years, the accountant of company Marion
Mason decided to change the depreciation method of company from straight line method to
sum of years’ digit method. However Marion did not disclose the change of method in the
financial statements of the company as the reason given by the General Manager Peter was
not a sound reason for change of method and in the opinion of Maron it will not form any
good impression on the stakeholders of company and other users of financial information
(Sun & Rath, 2010).
The non-disclosure of change in method of depreciation by Marion is an act of violation of
provisions of accounting standards IAS 16 and AASB 116. The provisions of these
accountings standards require disclosure in the notes to financial statements and therefore, the
act of Marion does not comply with the requirements of IAS16/AASB116.
3

4

References
Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB
116 non-current asset measurement models. International Journal of Critical
Accounting, 6(5-6), pp.509-519.
Sun, L. and Rath, S., 2010. Earnings management research: a review of contemporary
research methods. Global Review of accounting and Finance, 1(1), pp.121-135.
5