ACC201 Financial Accounting Report: Contingent Liabilities Analysis

This report addresses key aspects of financial accounting as per AASB standards, including contingent liabilities, internally generated intangible assets, and the impairment of intangible assets. It explains the accounting treatment for contingent liabilities, including disclosure requirements and the recognition of provisions. The report further differentiates between internally generated and acquired intangible assets, highlighting the challenges in determining the cost of internally generated assets. It also discusses the impairment of intangible assets as per AASB 136. The report provides an analysis of a lawsuit filed against Delta Ltd, detailing the accounting implications under AASB 137. Finally, the report explores the reasons why companies may be reluctant to change AASB 138. The report concludes by emphasizing the importance of properly accounting for these items to ensure accurate financial reporting and effective business operations.

Running Head: Accounting and Financial Reporting
Accounting and Financial Reporting

Accounting and Financial Reporting
Contents
Executive Summary...............................................................................................................................2
Contingent Liabilities.............................................................................................................................2
Disclosure of accounting implications of the lawsuits by Delta Ltd. in its financial statements............2
Internally Generated Intangible Assets.................................................................................................2
Impairment of Intangible Assets............................................................................................................3
Internally generated intangible assets and acquired intangible assets.................................................3
Companies’ reluctance to press for changes in AASB 138.....................................................................3
Conclusion.............................................................................................................................................3
References.............................................................................................................................................5
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Accounting and Financial Reporting
Executive Summary
This report provides the method of accounting contingent liability, internally generated intangible
assets and impairment of intangible assets as per AASB 137, AASB 138 and AASB 136 respectively. It
also states the dissimilarity between the internally generated intangible asset and acquired
intangible asset. The method of disclosing accounting implication of a lawsuit under AASB 137 is also
sighted. Apart from this, the difference between the accounting of internally generated intangible
asset and acquired intangible asset is also evaluated. Finally, the possible reasons behind the
companies’ reluctance to press for changes in AASB138 are stated.
Contingent Liabilities
1. Disclosure of contingent liability is made only when the likelihood of resources representing
economic benefits is far away
2. That part of obligations where the outflow of funds representing economic benefits is possible
the entity identifies a provision except in the case where reliable evaluations cannot be
constructed
3. The provision is identified in the financial statements of the same time period in which an
outflow representing future monetary benefits is required for an element earlier considered as
a contingent liability.
4. Each entity must unveil the facts like nature of contingent liability, estimate showing the
financial effect of contingent liability, uncertainties linked with outflow amount or timing of
outflow and the probability of settlement if any.
Disclosure of accounting implications of the lawsuits by Delta Ltd. in its financial statements
A customer filed a lawsuit against Delta Ltd in December 2018. The lawsuit was for costs and
damages allegedly incurred as a result of the failure of one of Delta Ltd.’s electrical products. The
amount claimed was $3million. Delta Ltd.’s lawyers have advised that the amount claimed by the
customer is extortionate and Delta has a good chance of winning the case. However, the lawyers
have also advised that if Delta Ltd loses the case it is expected that costs and damages awarded
would be $500000.
At 31 December 2018
Present obligation as a result of a past obligating event – the obligating event is the costs and
damages arising because of the delta’s product failure, which is giving birth to a legal obligation.
An outflow of resources embodying economic benefits in settlement – It might be possible that an
outflow of $500000 will be required for the settlement of the obligation.
Conclusion – – Provision is recognised in order to meet the probable costs and damages for the
settlement of obligation (AASB 137, 2014).
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Accounting and Financial Reporting
Internally Generated Intangible Assets
All the expenditure which directly relates to the development of internally generated intangible
asset becomes eligible to get capitalised under AASB 138. The expenditure is categorised as research
or development based on which capitalisation of expenditure relies upon. The research expenditures
are expensed as incurred (AASB 138:54). In case all the 6 criteria given in para 57 of AASB 138 are
fulfilled then development expenditure can be capitalised. Few internally generated intangibles like
brands and mastheads cannot be recognised as stated by AASB 138:63 except patents. In the
absence of any related expenditure on the presence of internally generated assets, it would not be
recognised under AASB 138 (AASB 138, 2015).
Impairment of Intangible Assets
As per AASB136 all the assets are considered for the impairment except inventories, assets formed
from the construction contracts, deferred tax assets, employee benefits, assets which comes under
the scope of AASB 139, investment property measured at a fair value, biological asset, deferred
acquisition cost, the non-current asset categorized as “held for sale”.
This standard is exercised on all those financial assets which are categorized as subsidiaries, joint
ventures and associates.
The test of annual impairment is performed on intangible assets with an indefinite useful life or
those still unavailable for use by making a comparison between carrying amount and recoverable
amount (AASB 136, 2007).
Internally generated intangible assets and acquired intangible assets
There exists a market transaction for the acquired intangible assets, which are usually estimated at
cost but however are estimated at fair value in case of business combinations.
Acquisition amount is paid for acquiring an intangible asset. In case of cash payment, it becomes
easy to measure the reliable cost of acquired intangible assets and represents the entity’s
expectation of getting economic benefits in spite of uncertainty relating to the inflow amount or
timing.
In case related to internally generated intangible asset, it becomes challenging to quantity true cost
of the asset and distinguish the cost involved icreating an intangible asset from the cost involved in
running day-to-day operations and maintaining and enhancing internally generated goodwill
(AASB138, 2013).
Companies’ reluctance to press for changes in AASB 138
1. In spite of periodic amortisation at a later point of time, it is healthier and better for the
ratios like rates of return on assets and equity if write-offs take place at a present point of
time.
2. Write-offs are regarded as a one-time item and insignificant for valuation purpose by the
investors. Over periodic amortisation, a good number of big hit is viewed better.
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Accounting and Financial Reporting
3. As per accounting rules, the companies need to incur cost like one involved in running and
using the analytical models, computation of fair values and then to make payment to the
auditors for reviewing the measures.
Conclusion
Therefore, to operate the business successfully without any complications, the entities should
successfully account for contingent liability, internally generated intangible asset and impairment of
intangible asset as per the guidelines provided in AASB 137, AASB 138 and AASB 136. This may lead
the valuation of the company go up, and proper classification of intangible assets will help the entity
in making a good amount of profit.
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Accounting and Financial Reporting
References
AASB 136, (2007).Impairment of Assets.[Online].Available 15 May, 2019
https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf
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Accounting and Financial Reporting
AASB 137, (2014).Provisions, Contingent Liabilities and Contingent Assets.[Online].Available 15 May,
2019 https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPjun14_04-14.pdf.
AASB 138, (2013). Intangible Assets.[Online].Available 15 May, 2019
https://www.aasb.gov.au/admin/file/content105/c9/AASB138_07-04_FP_COMPdec12_07-13.pdf.
AASB 138, (2015).Intangible Assets.[Online].Available 15 May, 2019
https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf.
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