Page 400 - SBR Integrated Workbook STUDENT S18-J19

Chapter 25

Chapter 2

Example 1

Ethics
Accountants are professionals and therefore they are trusted by society. User
groups rely on the accountants to faithfully represent the performance and
position of an entity. Professional ethics are therefore a vital part of the
accountancy profession and ACCA members are bound by its Code of Ethics
and Conduct. By following the code of ethics, it is more likely that a faithful
representation of the company will be offered because the needs of the users
will be prioritised.

If the fair value model is used then investment properties are revalued to fair
value at each year end with the gain or loss recorded in profit or loss. As such,
if property prices rise then profits will also rise. This increases the chance that
the directors will receive their bonus.
If the sole purpose of choosing the fair value model is to maximise the
chances of receiving a bonus, then the principle of objectivity has been
compromised. The directors may be allowing self-interest to impact their
decision-making.
However, this might be too simplistic. Directors should select accounting
policies that provide key users groups with information that is relevant and
faithfully represented. Shareholders and lenders are more likely to be
interested in what the company’s assets are currently worth, rather than how
much was paid for them in previous years. Therefore, a fair value model might
be the stakeholders’ preference.
Although information about the fair values of investment property is disclosed
if entities use the cost model, this would lack prominence. It would also be
difficult for users who lack a detailed accounting knowledge to make full use of
such disclosures. Moreover, if other entities in the same sector typically
measure investment properties at fair value, then the directors’ decision would
enhance comparability.

Measuring assets at fair value enhances the quality of the information
contained in the financial statements, ultimately benefiting the users. In this
respect, the directors may be behaving ethically.

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