Reference no: EM132765847

Royal Docks is a public limited company that prepares financial statements in accordance with International Financial Reporting Standards. Royal Docks has a number of bank loans, which are repayable if it breaches its covenants. The covenants are based on profit before tax and reported assets.

A new accountant has recently started working at Royal Docks and has discovered some issues relating to the financial statements for the year ended 31 December 2019.

I. Royal Docks' statement of financial position includes an intangible asset. This asset is a portfolio of customers acquired from a similar business which had gone into liquidation two years ago. The accountant has asked the finance director why the asset has not been amortised in the current period. The finance director replied that he changed the assessment of the useful life of this intangible asset from 'finite' to 'indefinite'. He justified this on the grounds that it is impossible to foresee the length this intangible asset's useful life due to a number of factors, such as technological evolution and changing consumer behaviour.

II. Royal Docks owns investment properties that are measured using the fair value method. The accountant has discovered that the fair value is calculated as 'new-build value less obsolescence'. Valuations are conducted by the finance director. In order to determine the obsolescence, the director takes account of the age of the property and the nature of its use. Sales values for `similar properties in similar locations are available and are significantly less than the fair value estimated by the director.

III. Royal Docks has three main cash generating units (CGUs) which have goodwill attributed to them. The finance director has asked the accountant to perform an impairment test of the CGUs, using the most recent financial forecasts as the basis for value in use calculations. The realised cash flows for the CGUs were negative in 2019 and far below forecasted cash flows for that period. The directors have significantly raised cash flow forecasts for 2020 with little justification. The projected cash flows have been calculated by adding back depreciation charges to the budgeted result for the period with expected changes in working capital and capital expenditure not taken into account. The finance director has told the accountant that future promotions and pay rises are dependent on following this instruction.

REQUIRED:

Problem 1: Discuss the accounting and ethical implications of the above situations from the perspective of the reporting accountant.