- 5 Marks
Question
Esther is a Chartered Accountant who works in a team that reports to Ameka, the Finance Director of Novak Ltd. Ameka is also a Chartered Accountant and has a domineering personality. Novak Ltd revalues commercial properties in line with IAS 16: Property, Plant and Equipment. Valuation information received last year showed that the fair value of the property portfolio was 2% less than the carrying amount of the properties (with no single property being more than 4% difference). A downward revaluation was not recognised on the grounds that the carrying amount was not materially different from the fair value.
This year’s valuation shows a continued decline in the fair value of the property portfolio. It is now 5% less than the carrying amount of the properties with some properties now being 15% below the carrying amount. Esther submitted workings to Ameka in which she had recognised the downward revaluations in accordance with IAS 16. Ameka has sent Esther an email in response in which he wrote: “Stop bothering me with this rubbish. There is no need to write the properties down. The fair value of the portfolio is only 5% different from its carrying amount. Restate the numbers immediately.”
Required:
Advise Esther on the appropriate actions to take.
(5 marks)
Answer
Esther faces an ethical dilemma where she is being asked to act contrary to the requirements of IAS 16 and misstate financial information. The following are the appropriate actions Esther should take:
- Explain the Ethical Issue to Ameka:
Esther should first arrange a meeting with Ameka to explain that under IAS 16, when the fair value of revalued assets differs materially from their carrying amount, a revaluation must be recognised. A 5% decline is material, especially with some properties being 15% below their carrying amount, and it would be unethical to ignore the revaluation. - Refer to Professional Ethics:
Esther should remind Ameka of their professional obligations under the IESBA Code of Ethics for Professional Accountants, which requires accountants to act with integrity, objectivity, and professional competence. Failing to revalue the assets would result in misleading financial statements and could damage the credibility of the company’s financial reports. - Involve Senior Management or the Audit Committee:
If Ameka insists on not recognising the revaluation, Esther should escalate the issue to higher levels of management or the company’s audit committee. This will ensure that the ethical and financial reporting standards are followed, and Esther will have documented her concerns appropriately. - Document All Actions Taken:
Esther should maintain a record of all communications and actions taken in response to the issue. This includes keeping a copy of the email from Ameka and documenting her response and any discussions held. This will protect her in case of future investigations or consequences. - Consider Resignation or Whistleblowing if Necessary:
If the issue remains unresolved and Esther continues to face pressure to misstate the financial statements, she may need to consider resigning to maintain her professional integrity. She may also consider whistleblowing in accordance with local regulations, while ensuring that confidentiality requirements are respected.
(Marks evenly spread = 5 marks)
- Tags: Ethical dilemma, Financial Reporting, IAS 16, Professional Ethics, Revaluation
- Level: Level 2
- Topic: Professional and Ethical Issues in Financial Reporting
- Series: MAR 2024
- Uploader: Dotse