Corporate Governance Practices Sunshine Ltd

Added on - 28 May 2020

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Running Head: Corporate Governance PracticesChange in the Method ofDepreciation
Corporate Governance Practices1Executive summary:In this report, the case of Sunshine Ltd. is being analysed regarding its decision of changingthe method of depreciation from straight line method to sum of year’s digits method merelyfor the purpose of showing consistency in the profits earned by the company in last fewyears. The change in the depreciation method was intended to retain the shareholders of thecompany by showing consistent profits in the financial statements. The policy adopted by thecompany is not in the interest of the shareholders. Also, if such change is not disclosed in thenotes to accounts in the financial statements of the company, then it will be a violation ofrelevant accounting standard. The non-disclosure will also not be in accordance with thecorporate governance principles.
Corporate Governance Practices2Introduction:Depreciation is the systematic reduction in the cost of a fixed cost until the asset’s valuebecomes zero or near to zero. The reduction in the recorded value of the asset is done to givean impact of wear and tear nature of assets, asset obsolescence or depletion with the passageof time. Though, depreciation is charged to profit and loss account as an expense of thecurrent financial year however it is not an expense in real sense. Rather, it a mere allocationof cost of the asset to its useful life (Tsamis & Liapis, 2014). There does not occur any cashoutflow for depreciation. The prime purpose for which company charges depreciation on theassets is to prepare itself for the asset replacement one the useful life of asset already held bythe entity. There are various methods of calculating of depreciation on any fixed assets suchas straight-line method, written down method, sum of digits year method etc. (Tzovas, 2005).Analysis of the case:Though, both the Generally Accepted Accounting Principles and International FinancialReporting Standards does not prescribe any particular method of depreciation to bemandatorily applied by the entities, but both emphasises on promoting the uniformity andconsistency in the financial reporting practices (Gabriel, 2010). In the instant case,depreciation is charged by Sunshine Ltd. as per the straight line method. Under this methodthe useful life of the asset is determined firstly by making estimations. The expected salvagevalue of the asset is then deducted from the actual cost. The resulting amount is then equallydistributed to the overall useful life of the asset.The director of the Sunshine Ltd has instructed the accountant to change the method ofdeprecation from straight line to sum of years digits method to show the consistency ofprofits in all the years. The method of sum of years digit is emphasises on accelerating theprocess of depreciation. Under this method major portion of cost of asset is charged as
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