Accounting and Financial Reporting: Contingent Liabilities Report

This report, prepared for an individual accounting assessment, delves into the application of Australian Accounting Standards (AASB), specifically focusing on AASB 137 (Provisions, Contingent Liabilities and Contingent Assets) and AASB 138 (Intangible Assets). The report analyzes a case study invol...Read More

Running head: ACCOUNTING AND FINANCIAL REPORTING
Accounting and financial reporting
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1ACCOUNTING AND FINANCIAL REPORTING
Executive summary
Purpose of the report is focussing on the given scenario in context of various AASB like
AASB 137, AASB 136 and AASB 138. The report will highlight the issues regarding the
contingent liabilities and internally generated intangible assets. In light of the applicability for
different standards recommendations will be provided on the scenarios provided by the task.

2ACCOUNTING AND FINANCIAL REPORTING
Table of Contents
Answer 1....................................................................................................................................3
(A) Contingencies liabilities accounting as per AASB 137...............................................3
(B) Disclosure of accounting implications........................................................................3
Answer 2....................................................................................................................................3
(A) Internally generated intangible assets and impairment of the intangibles...................3
(B) Accounting for the internally generated intangible assets against the acquired
intangible asset.......................................................................................................................4
(C) Companies not willing to make more recognition for the internally generated
tangible assets.........................................................................................................................4
Reference....................................................................................................................................5

3ACCOUNTING AND FINANCIAL REPORTING
Answer 1
(A) Contingencies liabilities accounting as per AASB 137
Contingent liability is the potential liability that may not or may become the actual
one. Based on the occurring or non-occurring of the future event contingent liability’s
likelihood of becoming the actual liability depends. Contingent liability is reported in the
financial statement only when the event and amount can be estimated otherwise it is just
disclosed in the notes to accounts. If the amount of obligation can be estimated by the entity,
equal amount of money is kept aside to meet the liability when it will arise (Aasb.gov.au,
2019)
As stated by ASB 137, contingent liability shall not be reported in the financial
statement. However, the same shall be disclosed through notes to financial statement unless
the likelihood for outflow of the economic resources is very less. Where any organisation is
severely and jointly liable for any obligation part of the obligation that is projected to be
satisfied by other party is considered as contingent liability. However organisation records
provision for the part for which it is expected that the company will require outflow of the
economic benefits for satisfying the obligation. Only exception to this case is that the rare and
extreme scenario where the amount for the event cannot be estimated reliably. Contingent
liabilities are evaluated on continuous basis for determining whether there is any indication of
outflow of the economic resources as the contingent liability can be developed in such a way
that was not expected initially (Aasb.gov.au, 2019). If it is likely that economic benefits will
outflow in future from the entity for any item that was in previous period dealt as contingent
liability the company recognises provision in financial statement for the period under which
changes in the probability take place
(B) Disclosure of accounting implications
In the given scenario for Delta Limited, one of the customer filed lawsuit against the
company as one of its product caused damage to the customer and that cost the customer
huge amount of damage. Owing to this the customer claim damage that amounts to dollar 3
million. Looking into this huge amount Delta Limited’s layer is in the view that amount of
claim is extortionate and in this context Delta Limited has good chance to win the case.
However the lawyer also mentioned that if the company lose the case it will require $ 500000
to be paid as damage (Aasb.gov.au, 2019). In this case present obligation him is that the
company failed to provide best quality product and the product sold by it caused damage to
the customer hence the case gives rise to obligation that damage was suffered by the client
and hence the claim that is raised by the customer is considered as a valid. Though the lawyer
of the is in the view that the company has good chance of winning as the amount mentioned
in claim is too big, in case the company is in the losing end it will require paying $ 500000 as
payment for damage. Hence in this case it can be concluded that the company shall disclose
contingent liability in its notes for financial statement for the amount of $ 500000.
(Aasb.gov.au, 2019)
Answer 2
(A) Internally generated intangible assets and impairment of the intangibles
Owing to various issues recognition of the internally generated tangible assets are not
easy. These issues may involve –

4ACCOUNTING AND FINANCIAL REPORTING
 Cost of the assets cannot be reliably measured
Recognition of the fact that whether identifiable assets are there and the assets will
create the economic benefits that is projected from same (Aasb.gov.au, 2019)
Internally generated asset’s total cost is the entire expenditure carried out for the
project from the date its mat the recognition criteria 1st time. These costs involved all type of
costs those are required to prepare and bring the assets in the present condition or in the
condition that is required for the asset to use the same for the intended use. However, some
of the intangible assets like internally generated brad, mastheads and publishing title that is
generated internally shall not be reported in the financial statement as intangible assets
(Sinclair and Keller, 2014)
Evaluating the intangible assets for the purpose of impairment, requirement of AASB
136 is complied by the entity. The intangibles assets are tested by the entity on annual basis
for the purpose of impairment and the same is analysed by comparing the asset’s carrying
value against recoverable value. Though the impairment analysis can be carried out at any
time during the year, the time of analysis shall be same in each of the year (Aasb.gov.au,
2019)
(B) Accounting for the internally generated intangible assets against the acquired
intangible asset
Any entity acquires the intangible assets through the business combination and the
same is reported on the financial statement at the fair value at which the assets is acquired on
the acquisition date. However, the assets is reported in the financial statement only when the
asset can be segregated and while the assets is acquired through legal rise, sufficient
information is there for measuring the assets fair value. On the other hand, the intangible
assets that are generated internally are reported at cost and its value is established by
capitalising the cost for the part which is expensed during the production process. However,
the goodwill generated internally are not allowed to be reported as an asset as it does not have
any identifiable source (Yallwe and Buscemi, 2014)
(C) Companies not willing to make more recognition for the internally generated
tangible assets
Major reasons behind this are mentioned below –
 Investors consider write-off as an item of single time – adjustments for large amounts
are taken as a better approach as against the approach of periodic amortisation. The
major effect of this approach is the investors are happy regarding the better profits in
the later years (Steenkamp and Steenkamp, 2016)
 Overstating the future profits – if the organisation write-off large amounts on account
of research and development, it provides the surety that the entity will be able to
generate higher income from this and the same will be balanced by the amount of
amortisation expenses. Hence, the one-time write off will improve the company’s
future rate of ROA as against the periodic amortisation (Sacui and Szatmary, 2015)

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Reference
Aasb.gov.au. 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPjun14_04-14.pdf
[Accessed 23 May 2019].
Aasb.gov.au., 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB138_07-04_COMPjun14_07-14.pdf
[Accessed 23 May 2019].
Legislation.gov.au., 2019. AASB 136 - Impairment of Assets - August 2015 . [online]
Available at: https://www.legislation.gov.au/Details/F2017C00297/Download [Accessed 18
May 2019].
Sacui, V. and Szatmary, M.C., 2015. Intangible assets in business combinations. Revista de
Management Comparat International, 16(3), p.385.
Sinclair, R.N. and Keller, K.L., 2014. A case for brands as assets: Acquired and internally
developed. Journal of Brand Management, 21(4), pp.286-302.
Steenkamp, N. and Steenkamp, S., 2016. AASB 138: catalyst for managerial decisions
reducing R&D spending?. Journal of Financial Reporting and Accounting, 14(1), pp.116-
130.
Yallwe, A.H. and Buscemi, A., 2014. An era of intangible assets. Journal of Applied Finance
and Banking, 4(5), p.17.