Depreciation Method & Ethical Dilemmas

This assignment presents a case study about Sunshine Limited, where an accountant faces pressure from management to change the depreciation method for personal gain. The analysis delves into the ethical dilemmas faced by the accountant, exploring the potential consequences of non-compliance with accounting standards (AASB 116) and the impact on stakeholders. It examines the rationale behind the proposed change, its effects on financial reporting, and the broader implications for corporate governance and ethical conduct within Sunshine Limited.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
The current report aims to focus on Sunshine Limited, in which Kam Sunshine, the
general manager of the organisation has approached Maria Mars, the accountant. The motive was
to make some changes in the incoming profit of the firm in a discrete manner. As a result, Maria
Mars has been in dilemma, since she was worried about renewing her contract with the
organisation. The accountant of Sunshine Limited has conducted the actions because of the fear
of the contract renewal and negative feedback in order to behave against the managerial orders. It
is found out that the profits would remain constant with the change in the method of depreciation
because of reduction in depreciation expenses over the periods. However, this does not adhere to
AASB 116, since the accountant has not revealed such method change in the financial reports of
Sunshine Limited.

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Table of Contents
1. Introduction:................................................................................................................................3
2. Ethics and governance:................................................................................................................3
3. Role of the accountants in changing depreciation methods:.......................................................3
4. Stakeholders:................................................................................................................................3
5. Impact of AASB 116:..................................................................................................................3
6. Conclusion:..................................................................................................................................3
References:......................................................................................................................................4

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1. Introduction:
The current report aims to focus on Sunshine Limited, in which the accountant of the
firm, Maria Mars was approached on the part of Kam Sunshine, the general manager. The person
wanted to change the method in relation to income in a discrete fashion. As a result, Maria Mars
has been in dilemma, since she was worried about renewing her terms with the company. Even
though such actions are not ethical, the straight-line method of depreciation has been changed to
sum-of-years-digits method (SYD). Thus, the stakeholders identified from the case study
comprise of communities, shareholders, customers, governments, suppliers, partners, creditors,
general manager and accountant. The ethical issues in relation to Maria have been described and
the major norms violated on the part of the organisation comprise of lack of integrity,
transparency and objectivity. Finally, the role of Maria to change the method of depreciation is
described with adherence to the requirements of the organisation and the effect of AASB 116.
2. Ethics and governance:
In the words of Ball, Grubnic and Birchall (2014), morality has strong relationship with
governance and ethics and thus, it could not be imposed. However, the above-depicted ethics is
suitable, since both quality and work level would be improved, which would further increase the
overall confidence of the users. The governance and ethics-related problems of Sunshine Limited
are depicted as follows:
Breach of objectivity:
In order to make personal gains, Kam Sunshine has deceived the higher-level
management of Sunshine Limited and the person has obtained support from the accountant to
accomplish his gains. The company has utilised various depreciation methods on non-current
assets for representing the deflation effect and the depreciation method could signify the
condition where the benefits related to future assets are estimated to be obtained (Beatty and
Liao, 2014). The overall depreciation method has changed, which would lead to variance in
timing of depreciation. As a result, the actual decisions might influence the decisions of the
shareholders due to error estimates. The accountant has the responsibility to depict accounting
information effectively and disclosure of changes in financial statements would be revealed. This
contradicts the work ethics of the accountant and it has breached the doctrine of objectivity.
Lack of integrity and lucidity:
It is the right of the shareholders to obtain an overview of how profitable their
investments would be in the organisation. Depending on the variation pertaining to profitability
in their investments, the shareholders have the obligation to determine whether to retain the
company shares (Bebbington, Unerman and O'Dwyer, 2014). For meeting the expectations of the
shareholders of Sunshine Limited, Kam Sunshine has hidden the matter of change in
depreciation method in order to form illusion of uniform higher profit. Hence, Sunshine Limited
lacks integrity and lucidity for signifying rightful information to the users of financial reports.
3. Role of the accountants in changing depreciation methods:
The given case study clearly inherits that the accountant of Sunshine Limited has
changed the depreciation method from straight-line method to SYD method. The motive of
adopting the latter method is to reduce the profit level in the next two years in order to transfer

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the same 2018 and 2019 for guarding against the expected economic downturn. This could be
described with the help of the below-stated instance:
Asset cost = $500,000
Useful finite life = 5 years
Salvage value = $50,000
Now, the difference between profits using the two depreciation methods is illustrated
briefly as follows:
Straight-line depreciation method:
Straight-line depreciation = (Asset cost - Salvage value)/ Useful finite life
Straight-line depreciation = ($500,000 - $50,000)/5 = $90,000
Sum-of-years-digits depreciation method:
Sum-of-years-digits = Depreciable base x (Remaining useful finite life/ Sum-of-years-digits)
Sum-of-years-digits = n (n+1)/2
Sum-of-years-digits = 5 (5+1)/2
Sum-of-years-digits = 15
Statement showing changes in depreciation:
After modifying the depreciation method, the depreciation amount would rise in the
opening years; however, the trend would be falling in the upcoming years (Brown, 2014). This
would enable in keeping the consistency of profits because of the reduction in depreciation

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expenses over the periods. Thus, the accountant of the organisation has carried out its role of
changing the depreciation method for fulfilling the goals of the general manager of the
organisation, Kam Sunshine.
4. Stakeholders:
As laid out by Bushman (2014), a stakeholder could be a group, an individual or
organisation having interest in another organisation. The main stakeholders identified in case of
Sunshine Limited comprise of the following:
Communities and government:
The external stakeholders include the communities and government, since their
association is close with the organisation. Since the organisation operates within the
communities, the customers are not the only stakeholder to be affected. Even though they pay
taxes, the residents are expected informally to act in an ethical manner along with maintaining
environmental sustainability (Collier, 2015). Along with this, the communities expect the firms
to be involved with local charitable gifts and events. The governmental organisations make
decisions and such decisions could influence the overall business operations. Thus, hence it is
expected from the managers of the organisation to maintain strong relationships with the local
officials in order to project regulatory changes or development of community influencing
business operations.
Customers:
The immediate external stakeholder comprises of the customers, which is the most
profitable for Sunshine Limited. For retailers, consumers and customers are identical terms.
Hence, attracting, retaining and creating loyalty from the core consumers assures long-term
financial progress of a firm (Henderson et al. 2015). For business-to-business organisations,
business firms comprise of the customers and the products or services are exchanged for business
use. There is direct selling of trade resellers to the wholesalers or retailers; however, the end
customers are to be considered as stakeholders as well. For example, the distribution channel
would not succeed, if the customers do not purchase the final goods manufactured.
Suppliers and partners:
The suppliers and business partners are the crucial stakeholders in the existing
competitive world. The firms often tend to create loyal association with their suppliers and
associates. This would enable Sunshine Limited to establish common goals, combined vision and
strategies. The trade buyers and sellers could work in partnership effectively to provide
maximum value to the customers, which would be beneficial for all the partners (Gitman, Juchau
and Flanagan, 2015). Along with this, it is expected from the trade partners to act ethically in
order to avoid hampering the customer reputation of the firm related to Sunshine Limited.
Creditors:
As pointed out by Hoyle, Schaefer and Doupnik (2015), the companies often look for
lenders in order to finance business ventures, supply purchases and asset purchases. The banks
are granting loans for main purchases such as new building. The suppliers would be able to give
product inventory on account that an organisation incurs in future. The current creditors of
Sunshine Limited would expect the consistent meeting of deadlines, which would help the

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company in enhancing relationships with the creditors and this, in turn, would raise the profit
margin of accumulating quality funding in future.
Accountant:
Based on the case study, it is observed that Maria Mars is the accountant of Sunshine
Limited and the accountant has prepared the financial reports by switching the profit margin of
2016 and 2017 to the next two years respectively.
General Manager:
The provided case study clearly depicts that the general manager of Sunshine Limited is
Maria Mars and the person is responsible to make decisions in order to enhance the overall
performance of the organisation.
Shareholders:
The individuals investing in Sunshine Limited in order to reap the benefits by obtaining a
part of the net income are classified as the main stakeholders of the firm.
5. Impact of AASB 116:
As identified from the case study, Kam Sunshine has asked Maria Mars in devising a
way to minimise the profits in the next two years starting from 2016 onwards. Hence, it would
fetch unswerving profits for benefitting the shareholders in the next two years (Hribar, Kravet
and Wilson, 2014). Maria has changed the depreciation method eventually from straight-line to
SYD method and she did not reveal such modification made in the annual report of the
organisation.
The compiled standard, “AASB 116 associated with property, plant and equipment” is
applicable to annual reporting periods initiating on or after 1st July 2009. This standard aims to
describe the accounting treatment associated with property, plant and equipment in order to
discern information to the users of the financial reports. This is associated with the investment of
the organisation on these assets and the modifications made in such investment (Li, 2015). The
main issues associated with accounting in relation to property, plant and equipment are the asset
realisation, carrying amount ascertainment, depreciation changes and the losses of impairment to
be recognised in relation to them.
According to the provided case, the depreciation method has changed from straight-line
to SYD. The concept of the method of depreciation is distribution the tangible asset cost over the
useful finite life of that asset (Macve, 2015). It is observed that the organisations are involved to
depreciate non-current or fixed assets for accounting as well as purposes related to tax. The
former has an influence on the reported net income of the firm, while the financial position might
be influenced on the part of the former. Initially, the cost apportionment is made as depreciation
expenditure in the period, in which the asset could be utilised (Pratt, 2016).
The business firms often recognise this expense for financial reporting and tax purposes.
The ways of computing depreciation and the years over which the depreciation of assets would
be carried out, might deviate between the kinds of assets within the same business and
modification for tax-related purposes (Smith, 2017). The accounting laws or standards need to

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specify the same, since they vary from country to country. There are various methods of
computing depreciation expense like straight-line, sum-of-years-digits and declining balance
methods. The introduction of depreciation expenditure is evident when the asset is placed in
service.
In the words of Warren and Jones (2018), the SYD method is a rapid process of
computing the asset depreciation. The formula for calculating the overall depreciation value
under this method is represented as follows:
Sum-of-years-digits depreciation = Depreciable base x (Remaining useful finite life/ SYD
method)
This method is formed for signifying the consumption of the major asset. Moreover, it is
utilised when any particular pattern to the method is not present, in which the asset is to be used
over the years. The straight-line depreciation method incurs expenses in a uniform fashion over
the useful finite life on fixed assets (Weygandt, Kimmel and Kieso, 2015). This depreciation
method is suitable where the economic recognition where the economic recognition from an
asset is estimated to be realised over the lives in an uniform manner.
Depreciation per annum = (Cost - Residual value)/ Useful finite life
The case study states that Sunshine Limited is a large departmental store and the top-level
members of the organisation take decisions in combination based on regulations during its
establishment. Due to this, Kam Sunshine has breached the policy of the organisation by making
self-decisions, and the financial statements of the organisation are affected directly due to this. In
addition, in this case, in which the changes to the organisation were conducted, the ultimate
decision is required to be revealed to all the stakeholders related to the organisation. Therefore, it
could be inferred that the change of depreciation method enforced on the part of Maria Mars has
not adhered to the AASB 116 requirements.
6. Conclusion:
The above evaluation clearly states that the managerial actions towards approaching an
employee and making recommendations in changing the depreciation method would have
considerable effect on code of conduct and ethics within the firm. However, the accountant of
the organisation has undertaken such actions because she might not be able to renew her contract
and she might receive negative feedback in order to behave against the managerial orders. It is
found out that constant profits would be maintained with the change in the method of
depreciation because of reduction in depreciation expenses over the periods. However, this does
not adhere to AASB 116, since the accountant has not revealed such method change in the
financial reports of Sunshine Limited.

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