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Corporate Governance Practices Sunshine Ltd

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Added on  2020-05-28

Corporate Governance Practices Sunshine Ltd

   Added on 2020-05-28

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Running Head: Corporate Governance PracticesChange in the Method ofDepreciation
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Corporate Governance Practices1Executive summary:In this report, the case of Sunshine Ltd. is being analysed regarding its decision of changing the method of depreciation from straight line method to sum of year’s digits method merely for the purpose of showing consistency in the profits earned by the company in last few years. The change in the depreciation method was intended to retain the shareholders of the company by showing consistent profits in the financial statements. The policy adopted by the company is not in the interest of the shareholders. Also, if such change is not disclosed in the notes to accounts in the financial statements of the company, then it will be a violation of relevant accounting standard. The non-disclosure will also not be in accordance with the corporate governance principles.
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Corporate Governance Practices2Introduction:Depreciation is the systematic reduction in the cost of a fixed cost until the asset’s value becomes zero or near to zero. The reduction in the recorded value of the asset is done to give an impact of wear and tear nature of assets, asset obsolescence or depletion with the passage of time. Though, depreciation is charged to profit and loss account as an expense of the current financial year however it is not an expense in real sense. Rather, it a mere allocation of cost of the asset to its useful life (Tsamis & Liapis, 2014). There does not occur any cash outflow for depreciation. The prime purpose for which company charges depreciation on the assets is to prepare itself for the asset replacement one the useful life of asset already held by the entity. There are various methods of calculating of depreciation on any fixed assets such as 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 Financial Reporting Standards does not prescribe any particular method of depreciation to be mandatorily applied by the entities, but both emphasises on promoting the uniformity and consistency 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 method the useful life of the asset is determined firstly by making estimations. The expected salvage value of the asset is then deducted from the actual cost. The resulting amount is then equally distributed to the overall useful life of the asset. The director of the Sunshine Ltd has instructed the accountant to change the method of deprecation from straight line to sum of years digits method to show the consistency of profits in all the years. The method of sum of years digit is emphasises on accelerating the process of depreciation. Under this method major portion of cost of asset is charged as
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