Accounting Issues and Solutions for Pewter Limited

This letter provides solutions to the accounting issues faced by Pewter Limited, including the classification of guarantees, treatment of uncertain events, and more. The issues involve contingent liabilities, repair costs, and the valuation of intangible assets. The solutions are provided with reference to relevant accounting standards in Australia.

McKenzie and Associates
668, George Street,
Melbourne, VIC 3000.
10th July 2018
Mr. Con Pewter
Managing Director
Pewter Limited
Level6, 510 King William Street
Adelaide SA 5000
Dear Pewter
Thank you for writing an email dated 05th July 2018 for providing an opportunity to help you
regarding the various numbers of issues in accounting that the company is confronting. I am
presently working as accountant for the accounting firm and through this email an opportunity
has been given to me for providing the advice on accounting issues.
The annexed letter will cover the solutions of all the issues in relation to accounting and the
presentation of financial statements thereon. The solution will be given with reference to the
relevant accounting standards of Australia. The letter has been marked to Ms. Maria McKenzie.
It has been a pleasure of serving you and thanking you for being our continued client. I am in the
opinion to hear you about the queries or the solutions given. I will be happy to help you.
Yours Faithfully
(Accountant)

ACCOUNTING ISSUE INVOLVED AND SOLUTIONS
Every company has its own system of accounting for the transactions in the books of accounts
and that too shall be done in accordance with the relevant accounting standard and the other
provisions of the Corporations Act 2001 and other similar statutes. But before discussing the
compliance with the requirements, it is necessary to have the accounting and similar issues
identified within the organization and then the treatment of the same shall be checked with
reference to the relevant laws of that particular country. In the given case of Pewter Limited,
there are major accounting issues involved in the treatment of various items and the same
accounting issues have been explained below:
 In the given case, it has been resolved that the company – Pewter Limited has given the
guarantee for any damage which is caused to the ship Steve Irwin. The accounting issue
is that whether the guarantee given shall be classified as the contingent liability
representing off the balance sheet or the guarantee shall be classified as the actual
liability.
 Second issue is that when the uncertain event for say ship has been badly damaged due
to Japanese whalers has occurred then the amount so incurred shall be accounted for in
the books of accounts as expense or it shall be shown as the liability
 The third issue is that whether the guarantee amount so disclosed will be reflected in the
Profit and loss account or the statement of the balance sheet.
 The fourth issue of accounting is that whether the repair costs so determined shall be
capitalize to the name of brand or else shall be charged to the statement of the profit and
loss account.
 The last and major accounting issue involves is that whether the company’s position of
the net worth will increase or work down.
The above issues have been identified from the statement made by you. The answer to all the
accounting issues involved has been mentioned in the below list.
 At first, the accounting treatment and the disclosure shall be detailed as to how the
guarantee shall be classified as the Contingent Liability. In accordance with the

provisions of the paragraph 10 of Australian Accounting Standard 137 on Provisions,
Contingent liabilities and Contingent Assets, contingent liability is defined as
o the possible obligation that has been arisen for the events occurred in the past and
the existence of whom will be confirmed only when the event related to the
guarantee is confirmed and
o also includes the obligation which is present and has been occurred from the
events that has occurred in the past shall not be recognized as the contingent
liability if it is much probable that no economic benefits will be received in future
and the liability cannot be measured reliably.
In accordance with above terms and definitions mentioned, the amount of guarantee
given shall be recognized as contingent liability in the notes to accounts of the
company embedded in the financial statement of the company.
 The second treatment is when the guarantee is invoked which means when the event
happen if the damage is happened to the ship – Steve Irwin then the contingent liability
so maintained shall be transferred as the confirmed liability and will regarded as the
provision in the financial statement of the company. The provision is created only
because of the following reason:
o As per the paragraph 14 of the AASB 137, provision shall be recognized in the
books of accounts of the company only if the company at present has the
obligation which is further because of events occurred in the past and it is sure
that there will be the outflow of resources which will be the need for settling the
present obligation and the amount to be paid can be measured reliably.
 The third accounting issue deals with the disclosure of the contingent liability in the
financial statements of the company. It shall be either disclosed in the statement of the
profit or loss or in the balance sheet or somewhere else. As per paragraph 86 of the
Accounting Standard 137, contingent liability is required to be disclosed off the balance
sheet in the notes to accounts with the following details (AASB, 2011):

o Nature of the contingent liability shall be disclosed. It means the company is
required to mention the guarantee and its nature as to why it is being created in
favor of the ship.
o A reliable estimate of the amount that is involved in the guarantee amount for the
reporting period
o An indication that some kind of uncertainty can happen and the amount involved
in that event.
o If the company has any type of counter guarantee as a way of having the
reimbursement then the same also be disclosed.
 Currently the company is having the two brand names – Arctic fresh and tropical taste. In
the given case the company has the reputation regarding the compliance with rules and
regulations of the environmental laws and encouraging the protection of the animals as
well as the environment. Therefore, these brand names are the value creation asset for the
company. Only because of these two brands along with the acknowledgement of the
environmental responsibilities the company has been able to create its name in the
market. The fourth major issue in accounting is that in case any repair costs is incurred in
relation to Steve Irwin then whether the cost so incurred can be capitalized (Reilly, 2015).
The answer to this question is yes.
o In accordance with the provisions of the Australian Accounting Standard number
138 on Intangible assets, it has been mentioned that brand is an intangible assets
and its recognition and measurement shall be according to the paragraph number
of this standard only (AASB, 2012).
o As per the said standard, any type of expenditure which is incurred for the
marketing of the product or for the enhancement of the brands, the value shall be
arrived by adding the marketing and other related cost to the carrying amount of
the brand.
o It has been added because of the major reason that the company has entered into
the contract of guarantee whereby the company has agreed to pay the amount of
repair only to maintain their image and reputation and accordingly the said
amount so paid will be treated as the capital expenditure as incurred for increasing

the valuation of brand and accordingly the same shall be added to the carrying
amount of the brands (Smith, 2010).
o Something which increases the value of the intangibles shall be capitalized as
done in case of the brands.
o It is to be mentioned that the self constructed intangible assets are not recognized
in the books of accounts and therefore shall not be considered for the purpose of
making the decision (Lev, 2013).
 The last issue in accounting deals with the information as to whether the net worth of the
company will be increased or not with the valuation of the brand name. With reference
to the previous question, once the value of the intangibles are created as with high value
then there will be the high chances of having the higher net worth. It is because net worth
is equal to the Total assets less liabilities and total assets include all the assets. The
increase in net worth will further will help in attracting more and more funds from the
investors.
REFERNCES
AASB, (2011), “Provisions, Contingent Liabilities and Contingent Assets” available on
http://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf
accessed on 04-05-2018
AASB (2012), “Intangible Assets” available on
http://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf
accessed on 04-05-2018.
Lev, B., (2013), “Remarks on the measurement, valuation, and reporting of intangible assets”
Reilly, R.F., (2015), “Valuing intangible assets” McGraw Hill Professional.
Smith, G.V., (2010), “Valuation of intellectual property and intangible assets” (Vol. 13). Wiley.