Accounting: Contingent Liabilities and Long Lived Assets

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Critical thinking:
Any amount that could become due from the company or that entails an outflow of resources
would be reported as a contingent liability. This amount would result in an outflow of
resources for the company due to the past events and the circumstances that have taken place
in the past with the company. In respect of this, the present obligation arises from the past
events of the company and the same is recognised due to the probability of the outflow of the
resources which embodies the economic benefits that would be required to settle the
obligation. This is the amount of the obligation that is not capable of being measured with
reliability.
In respect of the contingent liabilities, the company shall not report or record the contingent
liability. Any contingent liability will have to be disclosed by the company, unless the
payment of the same is remote. Wherein the company is jointly and severally responsible for
the obligation for the payment, then in such of the case, only the proportion of the obligation
which is payable by the company will have to be reported in the financial accounts. This is in
the light of the fact that only a proportion of the stated obligation will have to be paid by the
company. The company shall provide a provision for that part of the obligation which entails
an outflow of the resources of the company. The amount should be capable of being
measured with reliability and a reasonable estimation should be made for the same (AASB,
2019). All of the contingent liabilities should be developed in the way which was not
expected earlier. Hence, these have to be estimated for the purposes of determining the
outflow of the resources which embodies the economic benefits that would become probable.
In case, there is a probability that there would be an outflow of the economic benefits that
would be required for the purposes of dealing with the amount of the contingent liability, then
the provision for the same will have to be reported in the financial accounts as and when
there is a change in the probability of that the outflow of the resources have either become

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increased or have decreased. But this does not hold true in the case, wherein there is no
reliable estimation that could be made.
In terms of the recording and reporting the amount of the provision, the company should
make the best estimate of the amount of the expenditure which is required for the purposes of
settling the present amount of the obligation as at the end of the period of reporting (CPA
Australia, 2019).
In the given case, during the year of 2009, the company Batteries4U had identified the fact
that the company was responsible for the purposes of cleaning up the environment. The
company was told to bear the stated expenses. This led to litigation and it was determined
that the expenses will have to be borne by the company. The company should have provided
a provision for this expense in its financials.
During the year 2010. The company was able to provide an estimation of the cost of cleaning
up the environment.
Now, in the first year, if the company did not know the amount of the expense that would be
incurred or the expense cannot be determined with reliability, then no disclosure is required
for this in the financials.
But during the year 2010, the company was able to determine the amount, then it should
provide a provision for this amount.
The following journal entry would be passed for the same:
Profit and Loss A/s Dr
To Provision for contingent liability