Accounting for Provisions and Contingencies

This assignment delves into the topic of accounting for provisions and contingent liabilities according to the Australian Accounting Standards Board (AASB) 137. It requires students to analyze various aspects of this standard, including the recognition criteria for provisions, the treatment of contingent liabilities, and the disclosure requirements. The assignment likely involves applying AASB 137 to specific case studies or scenarios and evaluating the appropriate accounting treatment based on the provided information.

Running head: COMPANY AND FINANCIAL REPORTING
Company and Financial Reporting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1COMPANY AND FINANCIAL REPORTING
Executive Summary:
The current report aims to evaluate the compliance of ANZ Bank with the relevant
accounting standards prevalent in Australia. In order to report the Bank Bill Swap Rate, ANZ
Bank needs to provide a brief description of the nature of the contingent liability, in
accordance with AASB 137 Paragraph 86, which is what it has done. In addition, it has
informed interested parties that the financial impact is uncertain and has therefore not
provided an estimate of the financial effect as required in Paragraph 86, where practicable.
For recording the fine payments, the contingent liability would no longer appear in the
financial statements at the end of the period because it would have already been paid.
In addition, ANZ Bank could depict all business and commercial loans in the form of
borrowings in the liability side of the balance sheet statement. The reasons for providing and
obtaining the business and commercial loans need to be disclosed in its annual report. Finally,
it has been found that based on the amount of capital lost, the loan portfolio might have to be
shrinking on the part of ANZ Bank or it needs to sell new bank shares to stay in conformance
to the rules of capital adequacy.

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Table of Contents
Part 1:.........................................................................................................................................3
Answer to Question 1.a:.........................................................................................................3
Part II:.........................................................................................................................................4
Answer to Question 2.a:.........................................................................................................4
Answer to Question 2.b:.........................................................................................................5
Part III:.......................................................................................................................................6
Answer to Question 3.a:.........................................................................................................6
Answer to Question 3.b:.........................................................................................................7
Answer to Question 3.c:.........................................................................................................8
Answer to Question 3.d:.........................................................................................................8
References:...............................................................................................................................10
Appendix:.................................................................................................................................12

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Part 1:
Answer to Question 1.a:
As ASIC only commenced legal proceedings in the Federal Court on 4 March 2016,
at the reporting date of 30 September 2016, these proceedings are in the early stages and no
reliable estimate can be made as to the amount of obligation, or whether there will be an
obligation. Therefore, in accordance with 1AASB 137 Paragraph 14, no current provision
needs to be made for the possibility of a contingent liability resulting from the litigation by
ASIC.
However, AASB 137 Paragraph 16 outlines that whether or not it is likely that a
present obligation exists, an entity shall disclose a contingent liability, unless the possibility
of an outflow is remote. It would therefore be more likely that the ANZ should disclose the
contingent liability, as there is probably a more than remote possibility that there will be an
outflow of resources embodying economic benefits, in the future, as a result of the court
proceedings by ASIC. It would be advisable to disclose now to avoid the chance of non-
compliance.
Below is the Note to the Financial Statements which ANZ included in its 2015-2016
Financial Statements in respect to these allegations.
Notes to the Financial Statements
Other Contingent Liabilities and Contingent Assets
ii) Proceedings in relation to Bank Bill Swap Rate (BBSW)
On 4 March 2016, ASIC commenced court proceedings against ANZ. ASIC is
seeking declarations and civil penalties for alleged market manipulation, unconscionable
conduct, misleading or deceptive conduct, and alleged breaches by ANZ of certain statutory
obligations as a financial services licensee. ASIC has subsequently initiated similar

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proceedings against two other Australian banks. ASIC’s case against ANZ concerns
transactions in the Australian interbank BBSW market in the period from March 2010 to May
2012. ANZ is defending the proceedings. The potential civil penalty or other financial impact
is uncertain.
ANZ has disclosed the contingent liability in accordance with AASB 137. At the
very least, ANZ was required to provide a brief description of the nature of the contingent
liability, in accordance with AASB 137 Paragraph 86, which is what they have done. They
have also informed interested parties that the financial impact is uncertain and have therefore
not provided an estimate of the financial effect as required in Paragraph 86, ‘where
practicable’. A Reference is also made to the BBSW proceedings in ‘Principal Risks and
Uncertainties Paragraph 28’, where the contingent liabilities as at 30 September 2016 are
listed.
Part II:
Answer to Question 2.a:
In these cases, there were clearly the present obligations resulting from past events,
being that it was clear that ANZ had not sought to determine the actual credit limit required
by the customers and had given them no options to elect a different overdraft amount, as
required by the National Credit Act, which is administered by ASIC. Therefore, there would
be probable outflows of resources embodying economic benefits, as a result of ANZs actions.
Along with this, a reliable estimate could be made of the amount of the obligation due the
fact that ASIC has a scale of fine amounts available. AASB 137 Paragraph 14 requires that a
Provision is made when all of these requirements are met. The estimated fines should be
recorded as a Contingent Liabilities at the time ANZ was notified of the proceedings.

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As the fines were due for payment 16 August 2016, the Contingent Liability would no
longer appear in the Financial Statements at the end of the period because it would have
already been paid. However, shareholders who had followed media releases would expect to
find some kind of detail about the proceedings and payment in the Notes to the Financial
Statements, as these kinds of events affect the decisions of investors and therefore, it has
impact on returns on investment. The fact that the fines are not an admission of guilt, does
not take away from the requirements of AASB and the fact that there was an outflow of
resources.
All that can be found is the following, insignificant references, as part of the
Chairman’s Report and Notes to Financial Statements 2016:
‘There is no doubt that mistakes have been made within the banking sector. At ANZ
this has resulted in regulatory investigations, concerns over the conduct of staff and legal
action involving former customers’ (Chairman’s Report ANZ 2016 Annual Report).
Moreover, in the Notes to Financial Statements 40: Other Contingent Liabilities and
Contingent Assets (v) Other Regulatory Reviews - ‘The nature of these investigations and
reviews can be wide ranging and, for example, currently include a range of matters including
responsible lending practices, wealth advice and product suitability, conduct in financial
markets and capital market transactions’.
Answer to Question 2.b:
In the words of Gordon and During (2016), bank overdraft is a type of financing
where the bank honours cheques in case of zero balance in the customer or business accounts
and as a result, it depicts negative balance in the bank account. Moreover, a special type of
bank overdraft is inherent, in which the cashbook balance is negative, while the bankbook
balance is positive. However, as the presentation of those cheques is not made, the bank
balance is not negative and there is absence of any actual bank overdraft (Council 2014).

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According to “Paragraph 71 of AASB 101”, the other current liabilities are not
settled as portion of the normal operating cycle; however, they are due for settlement within a
year after the reporting period or held mainly for lending. These include bank overdrafts,
dividends payable and other non-trade payables.
At times, ANZ Bank possesses the right in offsetting the balance of overdraft with
another business bank account; the overdraft could be netted off against the other bank
accounts that are maintained within the same bank. The net bank balance could be depicted in
the form of balance of cash at bank. In case, ANZ does not possess the right to offset, the
overdraft could be reported in the form of liability and in case; the overdraft is material,
reporting needs to be made distinct from other liabilities. In addition, since ANZ Bank has to
comply with AASB and IFRS, such overdraft needs to be treated in the form of cash and cash
equivalents. However, the movement associated with the bank overdraft need not be reported
in the statement of cash flows under any particular segment.
Part III:
Answer to Question 3.a:
According to “Paragraph 4.9 of AASB 9”, an organisation is needed to reclassify its
financial assets, in case; the goal of the business model related to those assets changes in the
organisational context. However, the frequency of such changes is very limited. The senior
management of the organisation need to ascertain those changes due to internal or external
reporting and relevancy needs to be present with the organisational operations while
demonstrating to the external parties (Aasb.gov.au 2017). Moreover, “Paragraph 5.9 (a) of
AASB 9” states that an entity has a portfolio of commercial loans that it is intending to sell
within shorter time span. The entity acquires an organisation managing commercial loans
having the business model holding the loans for gathering the contractual cash flows. Thus,

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the commercial loan portfolio is not for sale anymore and the management of portfolio is now
combined with the acquired commercial loans. All these are held for obtaining the contractual
cash flows.
ANZ Bank could depict all business and commercial loans in the form of borrowings
in the liability side of the balance sheet statement. The reasons for providing and obtaining
the business and commercial loans need to be disclosed in its annual report. Some of these
reasons might include investment in real estate, supporting the ongoing operating losses and
long-term software development (Minnis and Sutherland 2017). As a result, appropriate
information would be available to all the stakeholders of ANZ Bank and the compliance with
AASB 9 would be achieved fully.
Answer to Question 3.b:
The two major factors that have impact on the value of financial assets in ANZ Bank
and having relevancy to the banking sector include the following:
Cash management practices:
An effective cash management policy assures that a bank has cash in hand to finance
the working capital needs whether revenues are stable or fluctuating (Radebaugh 2014). Due
to this, the practices of cash management are the primary factors influencing the financial
assets in ANZ Bank. The aspects of cash management policy include formation of cash
reserves and collections of accounts receivable. The cash reserves raise the cash value in
bank account, which assures greater liquidity and ANZ Bank could clear its dues in case of
cash decline due to falling revenues. On the other hand, the procedures related to collections
of accounts receivable minimise the time needed to collect the owed money to the bank.
Thus, it could be depicted as decline in accounts receivable and rise in cash on hand in the
balance sheet statement.
Internal controls:

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As commented by Frias Aceituno, Rodríguez Ariza and Garcia Sánchez (2014),
inappropriate controls raise the risk of staff fraud and theft that might reduce the cash and
inventory values in the balance sheet statement of an organisation. Thus, ANZ Bank needs to
incorporate cash controls like duty separation, restricted access to financial data, utilising
receipts that are pre-numbered along with assuring that such receipts stay in order. Along
with this, the bank needs to ensure inventory controls like scheduled and random inventory
counts.
Answer to Question 3.c:
According to “Paragraph 7 of AASB 137”, provisions are defined as liabilities
having uncertain amount or timing. In few nations, the provisions are utilised in the context
of various items like impairment of assets, depreciation and doubtful debts. These are some
adjustments to the carrying amounts of the assets. In order to write off bad debts from the
annual report of ANZ Bank, if the accounts receivable of a business account is identified as
uncollectible, it needs to be written off by removing the account from the section of accounts
receivable. This method is considered as the allowance method and it complies with AASB
137 in an effective fashion (Crawford, Lont and Scott 2014).
In this case, the entry needed to write off the bad debt account has impact on the
balance sheet accounts only. The allowance for doubtful accounts needs to be debited, while
ANZ Bank is required to credit the accounts receivable (Ruch and Taylor 2015). Thus, the
bank need not have to report any loss or expense in its income statement. This is because
such write-off has been covered under the previous adjusting entries for the projected
expense of bad debts. Moreover, after ANZ Bank has written off the bad debt, it is possible
that the bank has been paid part or the entire written off account balances. In that case, the
bank could reinstate the account through reversal of the write-off entry and processing of the
written off amount.

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Answer to Question 3.d:
At the time of loan issuance, a liability is created for the borrower along with an asset
gain. The amount of the deposit increases with the supply of money (Everett 2015). At the
time the borrower writes a cheque in contrast to the deposit. ANZ Bank needs to transfer the
amount of reserve to the bank of the seller for clearing the cheque. The loan contract is still
inherent with the borrower, but the liability of deposit has vanished. The bank of the seller
has obtained the reserves along with an identical deposit liability. However, if the borrower
defaults on the contract of loan, ANZ Bank could not obtain any amount of the principal lent.
It then needs to write-off the overall loan amount in the form of an asset. It has resulted in
loss in identical amount of its capital, which would minimise its capital/asset ratio. Since the
liability of deposit has been transferred to another bank, the default could change the supply
of money.
Based on the amount of capital lost, the loan portfolio might have to be shrinking on
the part of ANZ Bank or it needs to sell new bank shares to stay in conformance to the rules
of capital adequacy. In addition, ANZ Bank might need to acquire excessive reserves to meet
the requirement of reserve ratio. However, as long as the solvency of the bank is maintained,
it could normally borrow the needed reserves in the federal funds market or from the federal
discount window.

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References:
Aasb.gov.au. (2017). [online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-09.pdf [Accessed 9 Oct. 2017].
Aasb.gov.au. (2017). [online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf
[Accessed 9 Oct. 2017].
Asic.gov.au. (2017). ASIC - Australian Securities and Investments Commission. [online]
Available at: http://www.asic.gov.au/about-asic/media-centre/find-a-media-release/2016-
releases/16-063mr-anz-pays-212-500-penalty-for-breaching-responsible-lending-laws-when-
offeringoverdrafts/ [Accessed 9 Oct. 2017].
Council, K.I., 2014. Annual Report 2015-2016.
Crawford, L., Lont, D. and Scott, T., 2014. The effect of more rules‐based guidance on
expense disclosure under International Financial Reporting Standards. Accounting &
Finance, 54(4), pp.1093-1124.
Everett, C.R., 2015. Group membership, relationship banking and loan default risk: the case
of online social lending.
Frias Aceituno, J.V., Rodríguez Ariza, L. and Garcia Sánchez, I.M., 2014. Explanatory
factors of integrated sustainability and financial reporting. Business strategy and the
environment, 23(1), pp.56-72.
Gordon, H.R. and During, C.Y., 2016. Quarterly Report.
Hillman, N.W., 2014. College on credit: A multilevel analysis of student loan default. The
Review of Higher Education, 37(2), pp.169-195.
Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms:
Evidence from small commercial loans. Journal of Accounting Research, 55(1), pp.197-233.

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Radebaugh, L.H., 2014. Environmental factors influencing the development of accounting
objectives, standards and practices in Peru. The international Journal of Accounting
Education and Research. Urbana, 11(1), pp.39-56.
Ruch, G.W. and Taylor, G., 2015. Accounting conservatism: A review of the
literature. Journal of Accounting Literature, 34, pp.17-38.

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Appendix:
AASB 137 Provisions, Contingent Liabilities and Contingent Assets states:
Paragraph 14
A provision shall be recognised when:
(a) An entity has a present obligation (legal or constructive) as a result of a past event;
(b) It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision shall be recognised.
AASB 137 Paragraph 16 outlines:
In rare cases, for example in a lawsuit, it may be disputed either whether certain
events have occurred or whether those events result in a present obligation. In such a case, an
entity determines whether a present obligation exists at the end of the reporting period by
taking account of all available evidence, including, for example, the opinion of experts. The
evidence considered includes any additional evidence provided by events after the reporting
period.
On the basis of such evidence:
(a) where it is more likely than not that a present obligation exists at the end of the reporting
period, the entity recognises a provision; and
(b) where it is more likely that no present obligation exists at the end of the reporting period,
the entity discloses a contingent liability, unless the possibility of an outflow of resources
embodying economic benefits is remote (see paragraph 86).
AASB 137 Paragraph 86 states:

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Unless the possibility of any outflow in settlement is remote, an entity shall disclose a
brief description of the nature of the contingent liability and, where practicable:
(a) an estimate of its financial effect, measured under paragraphs 36-52;
(b) an indication of the uncertainties relating to the amount or timing of any outflow; and
(c) the possibility of any reimbursement.

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