Accounting Standards and Policies Samples †MyAssignmenthelp.com

Question: Discuss about the Various Accounting Standards And Lays Down The Accounting Policies. Answer: Introduction In order to maintain certainty and comparability ofaccounting data, the authorities all over the world have laid down certain rules and regulation (Antle, Garstka and Sevigny, n.d.). Theaccounting standards lay down the norms for the enterprises for the preparation of the accounting statements. All the entities are required to abide by these norms. In the past it has been seen that, due to lack of a standard norm of presentation of information, the organisations in many cases have tried to manipulate theaccounting information in order to confuse the users of these financial statements. Therefore, in order to remove these uneven reporting norms the entities are required to abide by all the rules laid down in the accounting standards. (Bebbington, Gray and Laughlin, 2011) Application of Accounting Policies Estimates: In order to understand our case in a better way, we first need to understand about accounting policies, circumstances in which they can be changed and reporting requirement when such changes are made. The Australian Accounting Standard Board has laid down accounting standard 108 and 116, Accounting Policies, Changes in Accounting Estimates and Errors. This accounting standard guides us in the application of accounting policies. Whenever an entity wants to make a change in its accounting policy, it must refer to this accounting standard for guidance. (Berry, n.d.) This standard lays down that whenever an accounting standard is applicable to a transaction or an event, then in such cases the policies which are to be applied to these should be as per that particular accounting standard. It is the duty of the entity to consistently apply these policies laid down in accounting standard, unless another standard requires or permits them for the applicability of different policies which are appropriate in such circumstances. (CAANZ. and Kemp, 2017) A change in accounting policy can be permitted only in certain situations: If the change is required by accounting standard The change required in the accounting policy will lead to better presentation of financial information in the statements. The users of the financial statements require consistency in these policies so that they can compare the financial position, profitability and cash flows of the entity form time to time. Therefore, in order to make this possible it is necessary for the companies to apply the same accounting policies unless such changes satisfy the abovementioned points. There are certain situation when change in method or process is not termed as change in accounting policies. When the accounting policy is been applied to a transaction whose substance id different form the similar transactions recorded earlier. Also when the accounting policy is being applied to a transaction or even which has not ever occurred before or was immaterial, in such cases the change is not considered as change in accounting policy. (Chaudhry, n.d.) A change in accounting estimate is the adjustment which is made in the values of the assets or liabilities. A change in accounting estimate is due to availability of new information, and hence they are not considered as correction of errors. A change in accounting estimate can be made when the circumstances in which such estimates were made have changed. There should be availability of new information in order for an entity to make a change in accounting estimate. (Greuning, Scott and Terblanche, 2011) Whenever there is a change in accounting estimate the entity is liable to report such change in its statements for the financial year in which such change has been made along with future periods which will be affected by such change. If it is impracticable to disclose the effect of change for future years then the entity should disclose such facts in the reports. A change in accounting estimate is accounted for in the prospective periods whereas the change in accounting period to be accounted for in the retrospective periods. Now, we have understood the differences between accounting policy and estimate. In the given situation we see that there has been a change in depreciation method by the entity. The change of method of depreciation is to be classified as change of accounting estimate, and hence disclosures for the same are required to be made in the financial statements. (Houghton and Campbell, 2005) Depreciation methods, changes in method and disclosures: Depreciation is a charge on the value of the assets of the entity. Due to continuous use, changes in technologies and efflux of time the value of the assets of the entity decline. In order to record the assets at their fair value a certain amount is deducted from their carrying amount in order to display them at correct value. This deduction is named as depreciation. This is then charged to the profit and loss account of the company. Many entities use depreciation as the tool to manipulate the profits of the company. Therefore, standards have been laid down in order to bring consistency in methods and avoid fraudulent activities. (Hussey, 2011) There a lot of methods of charging depreciation, the entity should choose the method which is most suitable to its business type. The rate of depreciation used should be estimated using all the correct available information and with due diligence. (Hussey and Ong, n.d.) The rate of deprecation is to be reviewed year to year and if required should be adjusted taking into consideration the latest information. If there has been a change in life of the asset, or in the economic benefits that are to be derived, such factors should be taken into consideration while making the revision in deprecation rate. If there is any change in the circumstances in which the rate of depreciation was calculated, then in such case the method and the rate of depreciation can be changed. When the entity makes a change in depreciation method or rate it is accounted for as change in accounting estimate. The entity is liable to display the fact of such change in the financial statements along with its effect on the profits of the company. Let us now discuss the two types of depreciation method which are relevant to our given project: Straight line depreciation: under this method of depreciation the carrying amount of the asset is deducted with the salvage value (Klein, 2016). This gives us the value of the asset that is to be used or depleted over the life of the asset. Then this amount is distributed equally among the life of the asset. This gives an equal charge of depreciation over the life of the asset. For example, let the value of the asset be $ 10000 and its salvage value is $ 500, with a life of 5 years. The depreciation in this case will amount to $ 1900 per year for 5 years. This method gives consistent amount of depreciation and affects the profits in equal manner in each year. Sum of years digit method: this method of depreciation will be clearer if we try to understand it with an illustration. Let us machinery with a cost of $16000, salvage value $1000 and life of the asset as 5 years. Under the sum of year digit method, we take the sum of the digits of the life years of the asset, in the given case it amounts to 15 (1+2+3+4+5). In the first year the depreciation charged will be (5/15)*15000, which amounts to $5000. In the second year the depreciation charged will be (4/15)*15000, which amounts to $4000. Therefore, we see that under this method a heavy charge is created on the profits in the first year of the application of this method. (Larson and Miller, n.d.) Facts and solution of the given situation: In the given situation we see that there is a company called sunshine Ltd, which used to follow the straight line method of depreciation. The company is expected to generate high profits for the coming two years and for the further two years the growth is expected to fall due to economic conditions. The management of the company wants to have stable profits for all the four years, seeking solution for the same, they approach their accountant Maria. Maria is afraid that if she does not come up with a solution, her contract with the company will not be renewed, because of which she decided to change the method of depreciation form straight line method to sum of years digit method. Also, she did not disclose such fact in the financial statements as according to her the reason for such change would not be justified in the eyes of the shareholders. (Loftus, 2013) The accounting standard clearly states that change in method of depreciation is justices and will be considered a change in accounting estimate, if the circumstances under which the estimates were made have been changed. In the given scenario there is no such change of circumstance and Maria has still changed the method of depreciation in order to manipulate the profits of the entity. Therefore, change of depreciation method by Maria is not justified (Needles and Powers, 2010). The fact of change in depreciation method has not been mentioned by Maria in the financial statements is wrong (Needles and Powers, 2011). The accounting standard lies down that the any change of accounting estimate should be reported in the financial statement along with its monetary affect. In case such amount is not possible to ascertain, then the fact of such change such be mentioned in the financial statements in a form of note. The change in method of depreciation form straight line method to Sum of year digit method is ethically wrong too. In case the nature of the business justified such change then there would not have been any issue. But the fact that change in depreciation method was carried out just to even out the profits of the company for the coming years is very wrong. Conclusion Therefore, we see that the whole scenario of the management wanting even profits and Maria taking unethical steps in order to make them happy is wrong(Picker, 2010). The management should not try to manipulate profits in any case. Moreover, when Maria was unsure of Kams reason for making changes in profits of the company, she should have informed him about the ethical limitation of such changes. She should have presented to him the effects of such change. Making one mistake lead to another, this made Maria follow a path opposite from that of accounting standards. The company may in future face litigations due to such change. Maria should make changes in order to make things correct and should also let her manager, Kam know about the consequences of wanting to manipulate the profits of the company. (Warren, Reeve and Duchac, 2007) References Antle, R., Garstka, S. and Sevigny, K. (n.d.).Questions, exercises, problems, and cases to accompany financial accounting. 1st ed. Mason, Ohio: South-Western. Bebbington, J., Gray, R. and Laughlin, R. (2011).Financial accounting. 1st ed. Australia: Cengage Learning EMEA. Berry, A. (n.d.).Financial accounting. 1st ed. London: International Thomson Business. CAANZ. and Kemp, S. (2017).Auditing, assurance and ethics handbook 2017 Australia. 1st ed. Milton, Qld: Wiley. Chaudhry, A. (n.d.).Wiley 2016 interpretation and application of International Financial Reporting Standards. 1st ed. Greuning, H., Scott, D. and Terblanche, S. (2011).International financial reporting standards. 1st ed. Washington, D.C.: World Bank. Houghton, K. and Campbell, T. (2005).Ethics and Auditing. 1st ed. Canberra: ANU Press. Hussey, R. (2011).Fundamentals of international financial accounting and reporting. 1st ed. New Jersey [u.a.]: World Scientific. Hussey, R. and Ong, A. (n.d.).International financial reporting standards desk reference. 1st ed. Hoboken, N.J.: Wiley. Klein, G. (2016).Ethics in accounting. 1st ed. Hoboken, NJ: Wiley. Larson, K. and Miller, P. (n.d.).Financial accounting. 1st ed. Chicago, Ill: Irwin. Loftus, J. (2013).Understanding Australian accounting standards. 1st ed. Milton, Qld.: John Wiley and Sons. Needles, B. and Powers, M. (2010).Financial accounting. 1st ed. Mason, OH: South-Western Cengage Learning. Needles, B. and Powers, M. (2011).International financial reporting standards. 1st ed. Mason, Ohio: South Western Cengage Learning. Picker, R. (2010).Australian accounting standards. 1st ed. Milton, Qld.: John Wiley Sons Australia, Ltd. Warren, C., Reeve, J. and Duchac, J. (2007).Financial accounting. 1st ed. Mason, OH: Thomson/South-Western.