MA612 Ethics - NZZ Limited Case Study: Creative Accounting?

This case study examines the accounting practices of NZZ Limited, where CFO Juilette authorized several transactions questioned by auditors. These include recognizing sales before delivery, decreasing depreciation rates, and capitalizing all research and development expenditures. The analysis delves into whether these actions align with accounting standards like AASB 118, AASB 108, AASB 102, 111, 116 and 138 and whether they constitute creative accounting. The study concludes that the company's remuneration policy, which incentivizes profit growth, may encourage such practices. The document provides references to support its analysis of the ethical and accounting issues.

Table of Contents
ntroductionI .............................................................................................................................................2
Discussion on the case...........................................................................................................................2
Conclusion.............................................................................................................................................4
References.............................................................................................................................................5

Introduction
In the given case, the Juilette is the CFO and executive director of one of the listed companies
of New Zealand NZZ Limited. Her remuneration structure is comprises of the base salary of
$ 500000 and a bonus as well as per which the shares of the company would be allocated to
Juilette based on the achievement of certain specified performance measures and also the
bonus which is based on the annual growth in the profits earned by company (Defond &
Lennox, 2017).
Juilette during the course of business and closing the financial books has authorized for few
of the transactions in the month of June for current accounting period and which are
contradictory and the same is in discussion with the auditors.
Discussion on the case
Since these are all disputed transactions, the same needs to be resolved. The same has been
discussed below:
1. Sales made to wholesalers in June for which the delivery was being made in July has
been accounted as sales in the current reporting year: As per Para 14 of AASB 118,
revenue from customer can be accounted in the books if all the following conditions
have been met:
i. The entity has transferred the significant risk and reward and ownership of the
goods to the customer;
ii. The amount of revenue can be reliably measured;
iii. It is certain that the economic benefits with respect to the transaction will flow
to the entity;
iv. The entity does not retains the managerial involvement in ownership of goods
going forward neither does it have control over the goods being sold;
v. The costs or the expenses that have been incurred in relation to the transaction
can also be reliably measured (Alexander, 2016).
Thus, in the given case if Juilette is able to establish that all the above conditions have
been satisfied in June month itself and it is just the delivery of goods which was being
completed in July, then there is no ambiguity or dispute in recording the income in the

month of June. In case the above conditions are not satisfied, then it results in creative
accounting and thus should be reported in the audit report as an anomaly or
observation (Choy, 2018).
2. Depreciation rates have been decreased for all the categories of the non-current assets
for the current accounting year ended June: A change in the rates of depreciation
should be recorded in the financial statements as the change in the accounting
estimate. The effect must be recorded in the period of change if it solely affects that
period only or in the period of change as well as future periods if it affects both the
periods. The change in current year should not be recognized in the past year as an
adjustment. Furthermore, the rate of depreciation can only be changed if there is
significant change in the expected pattern of consumption of economic benefit from
the assets and such a change is regarded as change in accounting estimate as per
AASB 108. But the same should be shown in the disclosures clearly as to why such
change has been made, what the financial-impact is and whether it improves the
quality of reporting (Goldmann, 2016).
In the given case, if the scenario is warranted such that the decrease in depreciation
rate is required and appropriate disclosures are being made then the treatment shown
above is fine or else again is a case of creative accounting to increase the profitability
of the company and thereby earning bonus on account of the same (Dichev, 2017).
3. Research and development expenditures pertaining to the current year has all been
capitalized: As per the principles laid down in AASB 102, 111, 116 and 138, the
research costs should generally be expensed off to the profit and loss account. On the
other hand, Para 57(e) of AASB 138 asks for the capitalization of the development
costs if the same includes adequate technical, financial and other resources which are
required to complete a given work. As per the Financial Accounting Standards Board,
the R&D cost should be capitalised only if future economic benefits can be reaped out
of it and it can be reliably measured or else it should be expensed off. It is the main
reason why the R&D costs are generally being expensed off and not capitalized in the
books (Linden & Freeman, 2017).
In the given case, the company should be able to demonstrate that the company would
be earning the future economic benefits out of it or else it should be expensed off.
Further, research expenses should be charged to P&L in any case.

Conclusion
Post the above discussion and analysis, it can be seen that the company has used creative
accounting and the current remuneration policy in the company do encourages the same as
the bonus and the allocation of the shares in the company is directly based on the rise in the
annual profits of the company and achievement of performance measures. All the 3 situations
which were approved by Juilette led to the increase in profit and thereby would have
increased the bonus as well.

References
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