Analyzing Depreciation Methods and Financial Statement Manipulation

This assignment analyzes the application of depreciation methods in financial accounting, focusing on the manipulation of financial statements. The student explores the impact of changing depreciation methods, specifically comparing the straight-line method to the sum-of-the-years' digits method. The assignment highlights how altering depreciation methods can be used to manage reported profits, a practice known as window dressing. It references IAS 16/AASB 116 standards and discusses the requirements for disclosing changes in accounting policies. The solution also addresses the ethical implications of manipulating financial statements, emphasizing the potential impact on stakeholders, tax calculations, and the creation of deferred tax assets or liabilities. The student provides examples, references, and demonstrates an understanding of accounting principles and their practical application. The assignment concludes by emphasizing the importance of transparency and adherence to accounting standards to ensure accurate financial reporting.

By student name
Professor
University
Date: 01 September 2017.

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Contents
Question No. C……………………………………………………….………...2
Question No. D……………………………………………………….………...3
Refrences.....………………………………………………………………....... 4
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Question No. C
Depreciation is the measure of expense being apportioned over a period based on accounting
estimate and assumptions that the asset will last and give economic benefits to the entity over such
period. It is an estimation of the consumption of the asset. In the given case, Peter wanted Marion to
change the method of accounting such that huge profits in 2016 and 2017 are met by the expense
deduction on account of depreciation cost and that the low margins and low profits in 2018 – 2019
when the markets will not be on the high, to be adjusted with low depreciation cost. Yes, the change in
method from straight line to sum of the years digits shifted the major portion of the depreciation cost to
the first 2-3 years and then it will be keep on decreasing with the passage of time. (Das, 2017)Through
the use of this method, he ensured that the more depreciation costs are booked to Profit and loss in
initial years and less in the later years such that the profits would be seen consistent in the future years
as well when the economic slowdown will be there. This is shifting of the profits from the present to the
future accounting period and is an example of window dressing. This is one of the material
misstatements in order to manipulate the profits shown to the shareholders. As for example, if a
machinery’s life is 5 years and value is $ 1500,000, then using sum of the years digits method, the
depreciation costs would be in the ratio of 5:4:3:2:1 i.e., $ 500000, $ 400000, $ 300000, $ 200000 and $
100000 respectively. Therefore, it is in the decreasing trend. (Knechel & Salterio, 2016)
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Question No. D
As per the requirements of IAS 16/AASB 116, the depreciation policy adopted by the
management and the method of depreciation are the accounting estimates and is based on the future
economic benefits being derived from asset. Change in the method of depreciation is only warranted or
can be done in case
 new developments are known about the future benefits to be derived from the assets in
order to have better representation of the financial accounts or
 The new method is required by the standards or law.
Moreover, in case the change in method is there any time, the same should be disclosed in the Notes to
Accounts in the financial statements along with the reasons of change and its impact on the financial
statements and results. It is a change in the accounting policy and should be done prospectively for the
remaining useful life of the asset and not retrospectively. (Raiborn, et al., 2016)
In the given case, the Marion has violated the requirements of the standard in all the respects
and thereby manipulated the financial accounts in order to streamline the profits. Moreover, the same
has not been disclosed even in the financial statements. This is not only giving the false picture to the
stakeholders but will have major impacts of the tax calculation, deferred tax asset or liability creation,
etc. (Bae, 2017)
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References
Bae, S., 2017. The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From
Korea. Journal of Applied Business Research, 33(1), pp. 153-172.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
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