Method of Accounting Cocoa Ltd

Question: Discuss about the Method of Accounting for Cocoa Ltd. Answer: Introduction Ethics is a behavioral aspect that involves study of the circumstances and finding out what is right and what is wrong. Ethics is an important aspect in the field of accounting because test of moral conducts and evaluation of right or wrong is made at various stages in the accounting profession (Onyebuchi, 2011). For example, the accounting standards permit use of different policies; the choice of a particular policy for self interest may be unethical in certain circumstances. The professional accountants owe duty to guide the management in opting accounting policies that meet the standards of ethics. Inculcating the ethical behavior in the accountants and commanding their work so that standards of ethics are not breached has become really important. In the past many big corporations such as Enron, Worldcom, and Tyco doomed to failure because of breaching the principles of ethics in financial reporting (Porter and Norton, 2016). In the context developed above, a case of Cocoa Ltd has been analyzed. This case involves ethical issues in accounting which are the subject matter of discussion in this paper. Further, this paper also highlights the stakeholders the interest of whom will be affected due to the breach of ethical principles in accounting and financial reporting. The entire discussion on ethics and corporate governance will be produced in the context of depreciation accounting which is the central theme of this paper. The relevant provisions of AASB 116 that deals with the matter connected with accounting for depreciation. Ethics and Governance in Accounting The governance implies controlling, directing, and monitoring the activities in an organization. It is the top management in every organization that takes responsibility of implementing the governance system. Implementation of the Governance system is crucial to achieve the organizational goals and objectives (Onyebuchi, 2011). This is the reason that the regulators all around the world has made it obligatory for the companies to have stringent governance mechanism. The activities of the organization in every sphere, either its accounting, marketing, or administration are compulsorily to be directed and monitored by the governance mechanism. It is always perceived that good governance not only helps the organization in meeting out with the legal requirements but it also aids in attaining the business objectives (Akinkoye and Olasanmi, 2014). The good governance emphasizes on balancing the needs of all the stakeholders such as owners, management, customers, suppliers, lenders, government, and the society (Calder, 2008). It should be kept in mind that the advantages of goods governance accrue in the long term. The companies which deviate from the concepts of ethics or does not follow the principles of ethics and governance create hurdles in achieving their vision and mission. The impact of non compliance with the principles of ethics is so severe that it affects all the stakeholders. Failure of the company does not only affect the owners but it affects entire society and economy at large. The bigger the size of the company wider will be impact on the society and the environment (Calder, 2008). Thus, in order to achieve the long term goals, mission, and the vision, the companies should have adequate governance and controlling mechanism. In particular, the activities in the flied of accounting should be guided by the set of rules promulgated by the governance system (Calder, 2008). Further, the professionals in the field of accounting should adhere to the ethical principles and the rules of conduct while discharging their duties. The accountants should comply with the provisions of accounting standards and other regulatory requirements in regard to financial reporting. For instance, in the present case of Cocoa Ltd, the accountant is in ethical dilemma in regard to compliance with requirement of AASB 116 which deals with accounting for depreciation. The AASB 116 provided various methods to charge depreciation on the assets leaving choice of a particular method on the discretion of the entities (Dagwell, Wines, and Lambert, 2011). In this regard, from the ethical view point, it is crucial to note that the method of depreciation selected should be applied consistently and the change should be for appropriate reasons. The appropriateness of the reason is the matter of ethical concern. Depreciation Methods The provisions of AASB 116, Property, Plant, and Equipment state that the entity is free to choose the method of depreciation (AASB 116, 2016). However, whichever method is chosen, it should reflect the pattern of consumption of the expected future benefits that the entity expects from utilization of the asset. The primary methods of charging depreciation are straight line, diminishing value, production units, and sum of years digit method. Each method has its own peculiarities that differ from the other. The straight line method computes equal depreciation for each year throughout the useful life of the asset. In the case of diminishing value method, the depreciation is computed on the written down value each year. Computing the depreciation in this manner leads to heavy charge in the initial years while low charge in the later years (Benesh and Bryant, 2016). Further, the production unit method provides for computation of the depreciation based on expected capacity of the plant or machinery. The computation of depreciation under this method varies from year to year as the units of production vary (Benesh and Bryant, 2016). Apart from these methods, the sum of years digit is also one method that is applied in computing the depreciation. In this method, the depreciation is computed with reference to the sum of years digits. This method is similar to diminishing value method as far as pattern of depreciation charge is concerned. This implies that in this method also the charge of depreciation remains high in the initial years and it reduces down with the efflux of time (Benesh and Bryant, 2016). hus, the accounting standard does not specify as to which method is to be applied for computation of depreciation. However, it makes amply clear that method of depreciation once selected should be applied consistently (AASB 116, 2016). The change in method of depreciation is to be made only when warranted by the circumstances. Further, suitable disclosers in regard to change in the method of depreciation along with quantifying the impact of this change on the financial statements should be given. Current Case of Cocoa Ltd Cocoa Ltd is a company running a large departmental store. The company is having good growth in the profitability in recent years and expects the same to continue for couple of more years. However, the economic forecast for years to come after couple of years does not seem to be promising for the company. The management of the company suspects significant downfall in the profitability of the company after two years. Therefore, the management wants to manipulate the profit in the books of accounts of the current years to reduce it down so that fall in profit in the later years does not appear as a drastic collapse. In this regard, the general manager talks with the accountant of the company to find out a way to manipulate the financial statements. The accountant suggests change in the method of depreciation from straight line to sum of years digit method. The accountant knowing that the change in the method of depreciation is not for justified reasons allows it for personal benefits. This situation raises ethical issues in the accounting process. Findings and Discussion The analysis of the current case of Cocoa Ltd depicts the ethical issues being encountered in the accounting process. In this case the accountant of the company confronts an ethical dilemma when management asks to manipulate the books of accounts. This is the situation where ethical principles come to play. In these situations, the accountant should analyze the issues and test them on the principles of ethics and goods governance. The management is asking to change the method of depreciation from straight line to sum of years digit method. The reason for this change in the method of depreciation is not legitimate because its been sought for manipulating the financial performance. The straight line method of depreciation provides for equal depreciation change in all the years throughout useful life of the asset (Benesh and Bryant, 2016). The company is currently following straight line method of depreciation. On the other hand, sum years digit method provides for higher charge in the initial years of the useful life of the asset (Benesh and Bryant, 2016). Thus, by changing the method from straight line to sum of years digit, the company can increase the depreciation expense which will reduce the net profits of the company. The management is seeking for this collusion to manage profitability of the company in the later years when economic downturn is forecasted. The management wants to show consistency in the profits so that the investments could be kept intact. The investors faith will increase with the company earning consistent profits fighting with the adverse economic situations. Considering the facts of the case, the accountant should bear in mind that changing method of depreciation without a justified cause shall violate the provisions of accounting framework. Here, the accountant should take note that AASB 116 clearly states that the change in the method of depreciation should not be made unless it is evident that the new method will reflect the consumption pattern of the economic benefits from the use of asset more accurately (AASB 116, 2016). Thus, changing the method of depreciation from straight line to sum of years digit method could be justified when there is change in the economic conditions at large scale justifying writing down the value of asset more quickly. Further, the discloser requirements in regard to change in the method of depreciation are also not met. The provisions of AASB 116 specify that the entity should make appropriate disclosers in regard to reasons for change in the method of depreciation and account for it as change in accounting estimate in accordance with AASB 108 (AASB 116, 2016). The AASB 108 requires that the change in accounting estimate should be disclosed separately in the income statement to make the stakeholders aware of such change. However, in the current case, the accountant does not want to disclose it adequately. Here, the concealment of the relevant facts would result in violation of the principles of ethics and governance. Therefore, it is advisable to that disregarding the personal interest the management and the accountant should act fairly and honestly. The effects of violations of the principles of ethics and governance are horrible as has been seen in the past in the cases of Enron, Tyco, and Worldcom (Porter and Norton, 2016). The interest of all the stakeholders is put on risk when the management conducts business affairs unethically. In order to achieve the long term objectives and goals and to safeguard the interest of the investors and lenders it is crucial that the business affairs are being conducted ethically. Thus, the accountant is advised not to assist management in achieving its ulterior motives by giving unethical advice as to change in the method of depreciation. Conclusion The discussion in this paper revolves around the ethical issues being encountered in the accounting profession. Further, the paper also highlights the need for goods governance and its role in meeting ethical issues and challenges. The discussion on ethics and governance has been built on a case study of Cocoa Ltd. This case study involves an issue of change in the method of depreciation and evaluation of this change in the light of ethical principles. Further, the paper addresses the technical aspects of depreciation accounting by explaining the provisions of AASB 116. From the overall discussion, it could be inferred that the change in the method of depreciation in the current case is unethical. The change in method of depreciation from straight line to sum of years digit method for no appropriate reasons is violating the provisions of ethics and good governance. Therefore, in this situation, the accountant is advised not to allow the change in method of depreciation sought by the management. Further, if the management still insists for such change, the accountant should make appropriate discloser in this regard in the financial statements by way of notes to account. References AASB 116. 2016. Property, Plant, and Equipment. Retrieved December 31, 2016, from https://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun14_07-14.pdf Akinkoye, E.Y. and Olasanmi, O.O. 2014. Corporate governance practice and level of compliance among firms in Nigeria: Industry analysis. Journal of Business and Retail Management Research (JBRMR, 9(1), pp. 13-25. Benesh, B.K. and Bryant, M.K. 2016. Depreciation Handbook. LexisNexis. Calder, A. 2008. Corporate Governance: A Practical Guide to the Legal Frameworks and International Codes of Practice. Kogan Page Publishers. Dagwell, R., Wines, G., and Lambert, C. 2011. Corporate Accounting in Australia. Pearson Higher Education AU. IFAC. 2006. Code of Ethics for Professional Accountants. Retrieved December 19, 2016, from https://www.ifac.org/system/files/publications/files/ifac-code-of-ethics-for.pdf Onyebuchi, V.N. 2011. Ethics in Accounting. International Journal of Business and Social Science, 2 (10), pp. 275-276. Porter, G.A. and Norton, C.L. 2016. Using Financial Accounting Information: The Alternative to Debits and Credits. Cengage Learning.