Pringles Ltd Is A Large Department Store That Has Used The S

Pringles Ltd Is A Large Department Store That Has Used the Straight Li

Pringles Ltd is a large department store that has used the straight-line depreciation method since its inception. For the financial year ending 30 June 2015, the company reported a profit, and management anticipated that these high profits would persist into 2016 and 2017. However, economic forecasts indicated an impending slowdown, suggesting a decline in profits during 2018 and 2019. The general manager, Peter Pringle, approached the company accountant, Marion Mason, requesting her to find a way to reduce profits in the upcoming years and shift some of the income to 2018 and 2019 when profits might decline. The intent was to present a consistent profit pattern over several years to satisfy shareholders.

Marion, although uncomfortable with the reason for the change, was concerned about her job security if she resisted her superior's request. She decided to switch from the straight-line depreciation method to the sum-of-years’-digits (SYD) method—an accelerated depreciation method that results in higher depreciation expenses in early years and lower expenses later. Importantly, Marion chose not to disclose this change in the notes to the financial statements, reasoning that revealing the true motive behind the change—enticing shareholders with a more favorable profit trajectory—would harm her standing within the company.

The core issue is whether Marion's actions comply with the accounting standards, specifically IAS 16 (International Accounting Standard 16) and its Australian counterpart, AASB 116. IAS 16/ AASB 116 prescribe the accounting treatment for property, plant, and equipment, including depreciation policies and the disclosures necessary to ensure transparent financial reporting.

Compliance with IAS 16 / AASB 116:

IAS 16 sets out the principles for selecting and applying depreciation methods, including the requirement that depreciation methods should reflect the pattern in which the asset’s future economic benefits are consumed by the entity. The standard emphasizes that depreciation methods should be reviewed regularly, and changes should be accounted for prospectively (IAS 16.67). Additionally, IAS 16 mandates that any change in depreciation method must be justified by a change in the expected pattern of consumption of future economic benefits and disclosed in the financial statements.

Marion’s Decision to Change Depreciation Method:

In this case, Marion changed the depreciation method from straight-line to SYD. While the change in depreciation method itself is permissible under IAS 16, the justification behind such a change becomes critical. If the change is made to achieve a managerial or strategic aim—such as smoothing profits—rather than reflecting a genuine change in the pattern of benefits derived from assets, it constitutes a breach of the standard.

Disclosure Requirements:

IAS 16 requires entities to disclose the depreciation methods used, along with the reasons for any change (IAS 16.74). Specifically, disclosures should include why the new depreciation method provides a more appropriate representation of the asset’s consumption pattern (IAS 16.74(b)). Since Marion did not disclose the change or the underlying reason—aimed at manipulating profits—this leaves the company non-compliant with the disclosure standards.

Ethical and Standard-Related Considerations:

Changing depreciation methods to influence profit figures undermines the primary purpose of financial reporting, which is to provide true and fair view of the company’s financial position. The International Financial Reporting Standards (IFRS) promote transparency and objectivity, emphasizing that accounting policies should be applied consistently and justifiably, and changes should reflect underlying economic realities, not managerial preferences.

Conclusion:

Marion’s actions—changing depreciation method to manipulate profits without appropriate disclosure—do not comply with IAS 16/AASB 116. The change was motivated not by genuine economic or accounting considerations but by an attempt to distort financial results to meet managerial objectives. Such conduct breaches the requirement for transparent disclosure and the obligation to justify changes in accounting policies based on technical or economic reasons rather than strategic motives.

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Paper For Above instruction

Marion Mason’s decision to change the depreciation method from straight-line to sum-of-years’-digits without appropriate disclosure contravenes the requirements set out in IAS 16/ AASB 116. The standard emphasizes that depreciation methods should reflect the pattern in which economic benefits are consumed and that changes in those methods must be justified by a genuine change in the asset’s consumption pattern (IAS 16.67, 74). Since Marion’s modification appears motivated by a desire to manipulate profits rather than a real change in asset usage, it breaches the principles of fair and transparent financial reporting.

Furthermore, IAS 16 explicitly states that any change in depreciation method must be disclosed, including the reasons for that change. Disclosing such information ensures that stakeholders can understand the rationale behind changes and assess their impact on the financial statements (IAS 16.74). By withholding this disclosure, Marion has failed to meet the standard’s transparency requirements.

From an ethical perspective, altering depreciation methods for strategic reasons undermines the integrity of financial reports. The IFRS frameworks advocate for faithful representation and avoid accounting practices that could mislead users of financial statements (Gernon, 2020). Consequently, Marion’s actions not only violate IAS 16 but also compromise ethical standards of financial reporting.

In conclusion, Marion’s actions do not comply with IAS 16/ AASB 116 because they are motivated by manipulation rather than economic substance, and she failed to disclose the change, undermining the integrity and transparency of financial reports. Ethical and regulatory standards compel accountants to prioritize truthful reporting over management-driven manipulations.

References

  • Gernon, M. (2020). Ethical Guidelines for Financial Reporting. Journal of Accountancy, 229(4), 45-50.
  • International Accounting Standards Board. (2014). IAS 16 Property, Plant and Equipment. IFRS Foundation.
  • Australian Accounting Standards Board. (2014). AASB 116 Property, Plant and Equipment. AASB.
  • Barth, M. E., & Landsman, W. R. (2010). How Has Accounting Research Changed Our Understanding of Financial Reporting? Accounting, Organizations and Society, 35(8), 755-773.
  • Street, D. L., & Gray, S. J. (2020). Principles of Financial Accounting. Routledge.
  • Warren, C. S., Reeve, J. M., & Fess, P. E. (2019). Financial & Managerial Accounting. Cengage Learning.
  • Chen, G., & Zhang, X. (2019). Accounting Policy Choices and Earnings Management. Journal of Business Finance & Accounting, 46(9-10), 1441-1472.
  • Smith, J. (2021). Corporate Governance and Ethical Practices in Financial Reporting. International Journal of Accounting, 56(2), 231-245.
  • Larcker, D. F., & Tayan, B. (2018). Corporate Governance Matters. Pearson.
  • Healy, P. M., & Palepu, K. G. (2017). Business Analysis & Valuation. Cengage Learning.

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