Ethics and governance Changing depreciation methods

The assignment must be typed, use Arial font, 12 and hard copy submitted in lecture Week 11, Thursday class to Demi Chung and Friday class to Patricia Vakafua. Please ensure you attach a KOI assignment cover sheet with ID number and signed.

Late assignments will be penalised, 10% deduction per day.

Worth: 30 course marks

Pringles Ltd is a large department store that has used the straight-line depreciation method since the company was first formed. For the year ended 30 June 2015, the company made a record profit and management expected these high profits to continue at least into 2016 and 2017, although economists were generally predicting an economic slowdown and a subsequent fall in profits in 2018 and 2019.

The general manager, Peter Pringle, approached the accountant, Marion Mason, and asked her if she could find a way to reduce the profit in the next couple of years and transfer it to 2018 and 2019 when things may not be going so well. ‘This would give us consistent profits over the next few years and keep our shareholders happy,’ said Peter.

Although Marion did not feel that Peter’s reason for the change was justified, she was concerned that her contract with the company would not be renewed if she upset the general manager. After some consideration, Marion decided to change the depreciation method from the straight-line method to the sum-of-years’-digits method. Marion did not disclose this change in the notes to the financial statements as she felt that the reason given by Peter would not give a good impression.

Required

A. Who are the stakeholders in this situation?

B. What ethical issues, if any, arise in this situation?

C. How does the change in accounting methods by Marion meet the objectives set out by Peter?

D. Do Marion’s actions comply with the requirements of IAS 16/AASB 116?

E. Discuss the nature of depreciation in IAS 16/AASB 116. Outline alternative views considered for the accounting treatment of depreciation in the text book and discuss the rationale for the treatment adopted in the standard