Financial Statements Analysis

This report presents an analysis of the financial statements of Desklib, an online library for study material. The report evaluates the compliance of accounting facts and figures with prescribed accounting standards and the reliability of financial statements for internal and external users. The report covers topics such as contingencies and provisions, recognition criteria and measurement associated with provision or contingent liability, plant and equipment under financial leases, treatment of leases, non-current asset impairment method, valuation method for non-current assets, and more. The report concludes with recommendations for enhancing the disclosure and improving the quality of financial reporting.

Running head: FINANCIAL STATEMENTS ANALYSIS
Financial Statements Analysis
Name of the Student:
Name of the University:
Author Note

1FINANCIAL STATEMENTS ANALYSIS
Table of Contents
Introduction......................................................................................................................................2
1. Contingencies and Provisions......................................................................................................2
2. Recognition Criteria and Measurement associated with provision or contingent liability..........3
3. Contingency recorded..................................................................................................................4
4. Plant and Equipment under financial leases................................................................................5
5. Treatment of leases......................................................................................................................5
6. Reclassification of the leased item..............................................................................................7
7. Non-current asset – impairment method......................................................................................7
8. Valuation Method for Non Current Assets..................................................................................8
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

2FINANCIAL STATEMENTS ANALYSIS
Introduction:
In this particular assignment, the issues pertaining to accounting is presented in context of
Fairfax media. The analysis has been done for evaluating whether the accounting facts and
figures are presented in compliance with the prescribed accounting standard so that the financial
statements prepared are reliable for its internal as well as external users. For this purpose, data
and facts have been extracted from the annual report for year 2017.
1. Contingencies and Provisions:
Contingency refers to the liabilities and assets that are not accounted in the business and
have happened on an urgent basis. Disclosure of contingences is done by segregating into
number of financial components in the financial statements. In the financial report, contingencies
are disclosed by presenting in sub heading such as guarantees and defamation. Amount of
contingencies are disclosed net of GST amount that is payable or recoverable from taxation
authority (Armstrong et al. 2015).

3FINANCIAL STATEMENTS ANALYSIS
Recognition of provision is done by the group when it has constructive or legal
obligations for sacrificing the future benefits resulting from past events or transactions. For
future operating lease, no provisions are required by organization. Measurement of provision is
done using the discount cash flow methodology at the present value of best estimate of
expenditure that is required for setting the present obligation. Risks pertaining to prison are
factored into cash flow using a discount rate. Recognition of any amount of provision resulting
from past events and with passage of time is recognized as finance cost. Unless the dividends are
declared, there is no recognition of provision for dividend as liability.
2. Recognition Criteria and Measurement associated with provision or contingent liability
The measurement issues and recognition criteria in association with contingencies and
provisions are discussed below:
The carrying value of guarantees is measured at fair value in accordance with AASB 137.
Reporting entities in the group are sued for defamation and any other similar matters in the

4FINANCIAL STATEMENTS ANALYSIS
ordinary course of business. In regard to any undrawn letter, entity recognized the letter of credit
that is not limited to insurance or leases.
Measurement of provisions is based on estimates that will be used for setting the obligations
at the current reporting period. Current assessment of market situation and other associated risks
is reflected in the discount rate that is used for determining the present value of pre tax rate.
3. Contingency recorded
The contingencies that are disclosed in the annual report of Fairfax limited can be
referred to defamation and guaranteed. Any deficiency of funds is guaranteed by certain
controlled entities and the company in the event when entity to class order is wound up. At the
reporting date, there foes not exists any such deficiency. Defamation is about to sue entities from
time to time in event of any defamation. There was no legal action at the reporting date against
the consolidated entity except some of the items that have a material impact and is mentioned in
the notes to financial statements. In event of acquisition, any contingent consideration is
recognized at fair value and is transferred by the acquirer. Any change in the fair value of
consideration that is deemed to be liability is recognized in the income statement according to
AASB 139.
4. Plant and Equipment under financial leases
It is indicated by the image below that plant and equipment are under the finance lease
with total value of leasehold building at $ 36839 in year 2017.

5FINANCIAL STATEMENTS ANALYSIS
Figure: Property plant and Equipment
(Source: Fairfax.ca 2018)
The group in addition to leasing the building has entered into commercial lease on
warehouse and office premises, office equipment and motor vehicles. Total amount of operating
lease commitments stood at $ 544869 as on June, 2017 (Fairfax.ca 2018). Accounting policy
pertaining to lease is that any amount of net rental payments will be recognized as expense on a
straight line basis in the income statement. This would not include the amount relating to
contingent payments.
Lease commitments:
(Source: Fairfax.ca 2018)

6FINANCIAL STATEMENTS ANALYSIS
5. Treatment of leases
Leases of organization are treated according to the accounting standard AASB 16
that is effective from January, 2013. With reference to these particular lease standards, all the
items of lease having a term of over 12 years are recognized in the balance sheet. The
measurement of liabilities for leased payment and any corresponding right to use assets is done
at present value of the amounts that is expected to be paid over time. In addition to this, the
classification of lease as operating or financial lease will form the basis of cost recognition of
such leases in the income statement. Operating lease cost over the lease term will be recognized
as single operating expense on straight line basis and financing lease on other hand is recognized
both as an interest and operating expenses after disaggregating such lease.

7FINANCIAL STATEMENTS ANALYSIS
Figure: Balance Sheet
(Source: Fairfax.ca 2018)

8FINANCIAL STATEMENTS ANALYSIS
6. Reclassification of the leased item
The hypothetical situation where reclassification of leased items would be required can
be explained by presenting the issue. Some of the examples depicting the situation of leased
items reclassification are listed below:
 It is experienced by lease to have the option of purchasing the assets at a price that is
below the fair value o assets and it is at an expected price.
 It is resulted by lessors to have the ownership of assets transferred to the lease by the end
of lease term.
 Leases are enabled as indicated by the nature of leased assets to perform the
incorporation without making any major modifications.
7. Non-current asset – impairment method
In this particular question, details of particular noncurrent assets have been asked to
evaluate along with explaining the valuation of the same. The particular asset that has been
selected from the statement of financial position under the heading in current assets is
receivables. Receivables are the amounts that are yet to be received from debtors of company.
Total amount of receivables that have been recorded in the statement stood at $ 7897 in year
2017 compared to $ 3126 in year 2016 indicating that there is considerable increase in total
amount of receivables attributable to company (Fairfax.ca 2018).
The statement of financial position of group as on 25th June, 2017 involves a non current
asset relating to party loan receivable that is due from equity investee that is Stan entertainment

9FINANCIAL STATEMENTS ANALYSIS
Pty limited. It has been evaluated that the recognition criteria as outlined in the AASB 139
Financial instruments are met by loan receivables.
Receivables:
(Source: Fairfax.ca 2018)
The financial report of reporting entity reflects the valuation methodology that is used for
valuing the receivables. Recognition of receivable is initially done at fair value that is measured
subsequently at amortized cost. Such amortized cost is the original invoice by deducting
allowance for any amount that is not collected. All receivables other than trade debtors are not
past due and they are not taken into consideration by management for the purpose of impairment.
Total amount of receivables that is written off as uncollectible stood at $ 1770 as against $ 1616
(Fairfax.ca 2018). Trade receivables collectivity is reviewed on an ongoing basis and provision
regarding the same is made when it seems that debts will not be collected. On the revaluation of
noncurrent assets, organization makes use of assets revaluation reserve that is used for recording
any decrements and increments in the value on noncurrent assets.

10FINANCIAL STATEMENTS ANALYSIS
8. Valuation Method for Non Current Assets
An alternative method that can be used for valuing the noncurrent assets with reference to
the qualitative characteristics would be the valuation using historical cost or taking into account
fair value methodology. Implementation of these two measures that is fair value and historical
cost, would have the consequence of increasing the valuation of any specific account that would
be impacted negatively. However, it would be suitable to use the technique of fair value
compared to valuation using the historical cost. It is due to this particular fact that the accounting
board refers organization to employ the method of fair valuation for measuring the noncurrent
assets.
Conclusion:
A detailed analysis of various accounts to financial statements of Fairfax limited has been
presented in the report by referring to the annual report. Evaluation of several accounts such as
contingencies, provisions, noncurrent assets and valuation methodology has been discussed and
based on findings, conclusions have been drawn. It can be inferred from the above analysis that
reporting entity has more or less adhered to several accounting standards when evaluating
accounts as recommended by the accounting standard board. It is indicative of the fact that
accounting statements have been prepared with due care and diligence. However, it has also been
ascertained that there are not detailed disclosure regarding the valuation technique of some
noncurrent assets and proper disclosure in relation to contingencies. It is therefore recommended
to enhance the disclosure and make further improvement in quality of financial reporting.

11FINANCIAL STATEMENTS ANALYSIS
References list:
Armstrong, C., Guay, W.R., Mehran, H. and Weber, J., 2015. The role of information and
financial reporting in corporate governance: A review of the evidence and the implications for
banking firms and the financial services industry.
Beck, M.J., Glendening, M. and Hogan, C.E., 2016. Financial Statement Disaggregation,
Auditor Effort and Financial Reporting Quality. working paper, Michigan State University.
Dye, R.A., 2017. Some recent advances in the theory of financial reporting and
disclosures. Accounting Horizons, 31(3), pp.39-54.
Fairfax.ca. (2018). Fairfax - Financials - Annual Reports . [online] Available at:
https://www.fairfax.ca/financials/annual-reports/default.aspx [Accessed 21 May 2018].
Feng, M., Li, C., McVay, S.E. and Skaife, H., 2014. Does ineffective internal control over
financial reporting affect a firm's operations? Evidence from firms' inventory management. The
Accounting Review, 90(2), pp.529-557.
Martínez‐Ferrero, J., Garcia‐Sanchez, I.M. and Cuadrado‐Ballesteros, B., 2015. Effect of
financial reporting quality on sustainability information disclosure. Corporate Social
Responsibility and Environmental Management, 22(1), pp.45-64.
Naranjo, P., Saavedra, D. and Verdi, R., 2017. Financial reporting regulation and financing
decisions.
Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.
Patelli, L. and Pedrini, M., 2015. Is tone at the top associated with financial reporting
aggressiveness?. Journal of Business Ethics, 126(1), pp.3-19.

12FINANCIAL STATEMENTS ANALYSIS
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Weetman, P., 2017. Financial reporting in Europe: Prospects for research. European
Management Journal.
Zeff, S.A., 2016. Forging accounting principles in five countries: A history and an analysis of
trends. Routledge.