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The Implication of Accounting Treatment

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Added on  2020-05-16

The Implication of Accounting Treatment

   Added on 2020-05-16

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Running head: TAXTaxName of the Student:Name of the University:Authors Note:
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2TAXMagenta and Associates 718 Gelong StreetMELBOURNE VIC 30020 January 2018Mr Chrstopher Sampson Managing Director Beachlife Ltd. Dear Mr ChristopherMagenta and Associates continuously perseveres in providing its clients with relevant,accurate and quality solutions faced by the clients. In response of your email this letter isbeing written to provide you with all the relevant and correct solution for the issues faced byyour company in respect of accounting treatments and disclosures to be given. We arehopeful that the issues will be eliminated with the application of the suggested solutions. The implication of accounting treatment is immense as the financial statements areused by the shareholders and creditors. The application of correct and appropriate accountingtreatment as laid down in the standards is necessary because only by adhering to the properaccounting treatment, the financial statements of the company will be able to show the trueand fair view of the entity’s financial position and performance (Taylor & Richardson, 2017).The main purpose of adopting the changes is to follow the requirements as given out indifferent paragraphs of AASB 137.
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3TAXAs per the guidelines of AASB 137 the meaning of the words contingent liability andprovision have been clearly given out. In order to understand the implication and treatment ofthese items the definition given in the accounting standard is discussed hereafter. Accordingto the guidelines of AASB 137 a provision is a liability whose timing and amount isuncertain. The contingent liability is also explained in the accounting standard AASB 137.The definition of the contingent liability is that the obligation that may arise in future due tothe past event of the entity and its existence is dependent on happening or non-happening ofan uncertain future event which may not be wholly in the control of the management(Sugiyama & Islam, 2016). The following reason for which the present obligation arising outof past events has not been recorded are that there are very remote chances of an outflow ofresources embodying economic benefits to take place for the settlement of the obligation. Inaddition to this the amount cannot be reliably estimated based on the available information.The relevant implication and accounting treatment of the items have been discussed whileexplaining the issues. Pending court case:The first issue faced by your company is related to the claim filed against it by itscompetitors for patent infringement. It is mainly concerned about the disclosure requirementand accounting treatment of the claims made by the competitors. A compensation of $87million has been claimed by the competitors. A hearing has been scheduled on 31st July 2017for the same. It has been estimated that there is a 30 % chance that the company will be foundguilty and will have to pay the full compensation. Other estimates have also been maderegarding other possible scenarios. There is a 60 % chance that the company will pay $50million and a 40 % chance that the company will pay $30 million. The financial statementshave already been approved and there is no current obligation that has arisen out of pastevents (Tran & Zhu 2017). This violates the recognition criteria of a provision as laid down
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