You are the financial controller of T Ltd, a company owned by the N family. Relationships between the family members have recently broken down. The finance director, S.N, has prepared draft financial statements for the year ended 30 June 2020. S.N has called you into her office and said: “I am away from the office for the next couple of weeks on urgent family business, so I need you to finalise the draft financial statements ready for our next board meeting. As you know I am planning to sell my shares to my brother as soon as we have agreed a fair price. The price will no doubt be influenced by the financial position and performance shown in the 2020 accounts. So I am keen that the accounts look as good as possible. If you can help me with this then I will recommend you as my successor as I will no longer be involved with the company once I have sold my shares.”

Both you and S.N are Chartered Accountants.

On reviewing the draft financial statements, you have discovered the following issues:

(1) T Ltd has historically depreciated general plant and equipment on a reducing balance basis, using a rate of 20%. In the draft financial statements S.N has changed to a straight-line basis over a total useful life of five years. The draft statement of changes in equity shows a prior period adjustment to reflect this change. This has had the effect of decreasing the carrying amount of plant and equipment and retained earnings at 1 July 2019 by £450,600. S.N then charged depreciation for the year ended 30 June 2020 based on one-fifth of the revised carrying amount, which gave a depreciation charge for the year of £504,120. All of T Ltd’s general plant and equipment was purchased on 1 July 2017.

(2) In May 2020 legal proceedings commenced against T Ltd’s catering division. The action was taken by 10 people who were taken ill after eating food at an event in March 2020 catered for by T Ltd. T Ltd’s lawyers have advised that it is unlikely that the company will be found liable. The case is not due to come to court until after the financial statements for the year ended 30 June 2020 are published. S.N has not recognised or disclosed anything in the draft financial statements in respect of this matter.

(3) On 1 January 2020 T plc acquired 40% of the ordinary shares of M Ltd for cash of £95,000, which gave T plc significant influence over M Ltd. At that date a property owned by M Ltd had a fair value £30,000 in excess of its carrying amount and a remaining useful life of 20 years. M Ltd made a profit after tax of £16,800 for the year ended 30 June 2020, which accrued evenly over the year.

Requirements 

Discuss the ethical issues arising for yourself and S.N and set out the steps that you should take to address them. 

Answer rating: 100% (QA)

Solution The ethical issues could arise from the following matters a Change in depreciation policy t... View the full answer