Corporations Act 2001 Assignment: Accounting Treatments

Added on - 28 May 2020

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718 Geelong Street,Melbourne, VIC 3000Telephone 62 8 1215 January 2018Mr. Christopher SampsonThe managing DirectorBeachlife Ltd.Level 7, 927 William Street,Brisbane QLD 4000Dear ChristopherIt’s been great pleasure to hear from you and thanks for your e-mail. We always tried toprovide our clients with best possible solutions for the purpose of making any major decision.Like before, this time also we will deliver you with the appropriate suggestions foraccounting treatments of the issues stated by you in your e-mail and the suggestions foraccounting treatments will be complied with the Corporation Act 2001, AASB and theaccounting interpretations issues by IFRS.You may be aware of the fact that contingent liabilities are the liabilities or the potential lossthat may take place in future based on the occurrence or non-occurrence of specific event orparticular outcome. Various examples of contingent liabilities are pending investigations,potential legal claims and product warranties (Pickeret al. 2016). A contingent liability isaccounted for in the financial statements if the amount of the liability is estimated. If theliability can be estimated then the company keep aside the amount for paying it in futurewhen it will arise. As per AASB 137, Para 23, a liability to be recognized there shall bepresent obligation as well as the probability that the resource outflow representing theeconomic benefits will be required to settle the obligations. As per Para 29, where thecompany severally and jointly is liable for any obligation are treated as the contingentliability. It is developed in such a way that initially it is not expected. Therefore, it iscontinuously analysed for determining whether resource outflow representing the economicbenefits has become probable or not. On the other hand, the provision is recognized when the
206 January 2018Mr Christopher Sampsoncompany has present constructive or legal obligation arising out of a past event and theamount of obligation can be reliably estimated. The main objective of provision is adjustingthe present year’s balance to present it more accurately, as the cost that belongs to thespecific year will definitely mislead the financial status if it is accounted in any other period.Therefore, provision is not the form for saving though it may seem so at once. Provisions aregenerally recognized under the balance sheet and are expensed under the income statement.Further, the main difference between provision and contingent liabilities are that theprovisions are recognised in the financial statement as liabilities and the contingent liabilitiesare not recorded as liabilities rather disclosed through notes to financial statements (Bova2016). If the liability is highly probable that is 60% to 90% then it is recognised as provisionin the financial statement, if the liability is more than 5% but less than 60% then it isdisclosed through notes to the financial statement and if the liability is less than 5% then noaction is taken.Therefore, complying with the requirements of AASB 137 on Provisions, ContingentLiabilities and Contingent assets, for the 1stissue stated in your e-mail, we would like tosuggest you that Beachlife Ltd shall disclosed the liability for pending legal claim sued by thecompetitor for patent infringement through the notes to the financial statement. This issuggested as the legal advisor of the company is in the opinion that there is only 30% chancethat the company will be found guilty, therefore, 70% chances are there that the company willnot be found guilty. As the chances of becoming guilty is less than 60% the amount ofliability shall be disclosed through notes. Further, 60% chances are there that the companywill be required to pay an amount of $ 50 million and 40% chances are there that thecompany will be required to pay an amount of $ 30 million. Therefore, the total amountrequired to be disclosed as notes under contingent liabilities will be ($ 50 million * 60%) + ($30 million * 40% = $ 42 million.For the 2ndcase, Beachlife entered into an agreement for sales with Alpine Ltd on 12thDecember 2017 for an amount of $ 180,000 and the payment for which is due on 31stDecember 2017. However, the equipment is to be delivered by Beachlife Ltd on 22ndDecember. As per the terms of agreement, Alpine Ltd was entitled to the equipmentmaintenance for 1sttwelve months after purchase to be provided by Beachlife Ltd. Theamount of maintenance for the entire year estimated by the seller company is $ 15,000.However, as per terms of the agreement if the maintenance provided by Beachlife is notfound satisfactory to Alpine, they are entitled to a refund of 15% of the price paid, that is $
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