Accounting Assignment: Contingent Liabilities

Added on - 28 May 2020

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106 January 2018Mr Christopher Sampson718 Geelong Street,Melbourne, VIC 3000Telephone 62 8 1215 7080www.magentaandassociates.com.au06 January 2018Mr. Christopher SampsonThe managing DirectorBeachlife Ltd.Level 7, 927 William Street,Brisbane QLD 4000Respected Sir,Thank you for making an effort to reach us over email. It is the primary purpose of our firm toprovide our clients with the best possible advice so that they can make an appropriate and
206 January 2018Mr Christopher Sampsonbeneficial decision. In the same way as we have always done before, this time also we assure youthat we are going to give you the most appropriate suggestion in relation to the accountingtreatment of the issues raised by you via email. In addition we promise you that the suggestionsin relation to assessment treatment would be in complaice of AASB, The corporation Act 2001(Cth) and accounting interpretation which are issued through IFRS.You must be knowing that potential losses or liabilities which may occur in the future in relationto the happening or not happening of a particular event or outcome is known as contingentliabilities. Potential legal claims, pending investigations as well as product warranties are a fewexample of contingent liability (Hennes 2014). In case the overall liability amount is estimated acontingent liability forms the part of a financial statement. The company would have the libertyof setting an additional amount aside in case the liability is estimated towards future payments.According toAASB 137, Para 23 the identification of a liability there has to be a currentresponsibility and in addition the probability that the economic benefit which is represented byresource outflow is needed to fulfil the responsibility. In situation where the company is jointlyand severally liable towards any responsibility it is treated as a contingent liability as under Para29. Thus continuous analysis is required for identifying whether economic benefits representedby research outflow would be probable or non probable (Picker et al. 2016).To the contrary, the rules would only be identified in situation where the company possessespresent legal or constructive responsibilities which are a result of past dealings and where it ispossible to reliably estimate the amount of obligation (Bova 2016). The primary objective ofthe provisions is to adjust the balance of the present year so that it can be more accurately
306 January 2018Mr Christopher Sampsonpresent, because the cost belonging to a particular year is evidently going to give the wrongimpression about financial status where it is done in relation to any other year. Thus it can beevidently stated that although apparent, the provisions are not a kind of saving. Generally thereorganization of provisions is done under the balance sheet and are also placed in the statementof income. In addition, the primary point of distinction between contingent liability andprovisions is that on one had contingent liabilities are disclosed via notes in financial statementrather than been recorded and on the other provisions are actually recognized in the statements.In case the probability of the liability occurring is very high and falls within the range of 60-90%than it is t be treated as a provisions in relation to the financial statement. On the contrary herethe probability of the liability is more than 5% but lower than 60% than it is to be disclosed vianotes in relation to the financial statement and in case it is lower than 5% than no further actionis needed.Thus in compliance of AASB 137 requirements in relation to contingent assets, contingentliability and provisions towards the initial issue raised by your E-mail it would be suggested toyou by us that the company (Beachlife Ltd) should disclose its liability in relation to pendinglegal claims where proceedings have been brought against it by the competitor words a change ofinfringing patents via the notes in financial statement. The suggestion is provided based uponthe fact that a predication has been done by the legal advisor that the company only has a 30%chance of being liable and in the same way changes that the company would not be held liableare high (70%). In addition there is a 40% change that the company would be subjected to apenalty of $30 million and a 60% chance that the penalty to be imposed on the company would
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