Accounting and Financial Reporting

Financial Reporting 1
ACCOUNTING AND FINANCIAL REPORTING
By (Name)
The Name of the Class
Professor
The Name of the School
The City and State
Date

Financial Reporting 2
Qns 1.
a. Contingent liabilities are those obligations which are expected to arise in the future date
following the uncertain event. These liabilities are difficult to account for because their
occurrence is based on probability and thus the extent to which the entity should
recognize such obligations cannot be determined with certainty. An example of a
contingent liability is a lawsuit against an entity and which the entity cannot determine
with certainty whether it will lose or win (Bachmair, 2016).
Since the occurrence of a contingent liability cannot be predicted with certainty, it
is difficult to account for it and the entity needs to only carry out a subjective assessment
to determine the probability of its occurrence. Contingent liabilities are supposed to be
recorded in the accounts only when it is probable that the future event will occur and
when its amount can be measured with reliability. In accounting for contingent liabilities,
a loss is usually debited while a liability is credited in advance of the settlement.
In practice, most of the contingent liabilities are those which may not occur and
whose amount cannot be measured with reliability. For these types of contingent
liabilities, firms tend to typically disclose them as notes to the financial statements
instead of recording them to the actual accounts (Bova, 2016).
b. The lawsuit against Delta ltd has been considered by lawyers as extortionate and thus the
company has a high chance of winning it. In this case, the liability is measurable but it is
not probable. AASB 137 requires all liabilities which are not probable to be disclosed as
notes to the financial statements. Delta Ltd should disclose notes to the financial
statements for the possible cost and damages of $500,000 if it loses the case (Hennes,
2014).
Qns 2
a. Intangible assets are those assets which arise from legal rights or contracts. An entity may
enjoy the benefit of ownership of such assets though they have neither physical existence
nor monetary measure. A good example of intangible assets includes computer software,
licenses, trademark, patents, films, copyrights and import quotas. Expenditure for such
assets is recognized as an expense. While the acquired intangible assets are recorded at
the historical cost, it is quite challenging to measure internally generated intangible
assets. Most entities expense intangible assets when they arise during the research phase.
Other assets may arise in the development phase of the organization and since
development has a future economic value, such assets qualify to be recognized (Lev,
2018).
Entities are required to measure intangible assets and subject them to an
impairment test. Just like ordinary assets, intangible assets lose their economic value with
time and thus they should be amortized. Amortization is based on the historical cost of
the assets and thus only acquired assets can be subjected to amortization.