Part A
A new accountant has been appointed to the firm of Catherine Ltd, which is a reporting entity that prepares general purpose financial statements according to the AASB standards. This company owns a large number of depreciable assets. Upon analyzing the entity’s current depreciation policy, which is based on straight line depreciation method the accountant realized that financial statements prepared by the entity do not show the true and fair view of company’s financial position. He, with the approval of the board, implemented a new policy based on the diminishing balance method assuming that company assets would reflect the realizable value.
Required
You are required to discuss this policy change.
In your report:
- Explain depreciable assets and describe what assets constitute property, plant and equipment in accordance with AASB 116?
- Explain the recognition criteria for property, plant and equipment.
- How does an entity choose between depreciation methods, for example, straight-line versus diminishing-balance methods in accordance with Para 60 of AASB 116?
- Explain which of the two depreciation methods provides the true and fair view of financial position and financial performance of Catherine Ltd.’s financial statements.
Sample Solution
