Fairfax Media Ltd: Provisions, Contingencies, Leases & Asset Valuation

This essay provides a detailed analysis of Fairfax Media Limited's financial reporting practices, focusing on provisions, contingencies, leased items, and the valuation of non-current assets, based on their 2017 annual report. It examines the recognition criteria and measurement issues associated with provisions and contingencies, specifically discussing employee benefits, restructuring, property-related provisions, and potential defamation claims. The essay also argues for and against the inclusion of contingency items in financial reports. Furthermore, it explores the classification and presentation of leased items, considering potential reclassifications under new accounting standards. Finally, the report evaluates the valuation method used for property, plant, and equipment, suggesting an alternative approach and concluding with the importance of adhering to accounting standards for accurate financial representation. Desklib offers this and other solved assignments for students.

Fairfax Media Limited is the company listed in the Australian Stock Exchange. It is operating
number of businesses around the assets of entertainment and the information. It has its operations
in the Australia as well as New Zealand. For the purpose of this Essay the annual report for the
year ending 25th of June 2017 have been analysed and all the eight requirements have been
detailed and discussed.
Provisions and contingencies recorded or disclosed:
Note number 13 and note number 22 of the annual report of the company has prescribed the
details of the provisions and the contingencies (Company Official Website, 2017).
In case of the provisions, the company has divided the provisions into current and noncurrent
provisions. Under the head of the current provisions, four sub heads are there. These are:
- Employee benefits
- Restructuring and Redundancy
- Property and
- Other
As per the accounting policies adopted by the company, the provisions are recognized when the
group has the lawful obligation to make sacrifice of the economic benefits in the future as a
result of the transactions that has been occurred in the past (Company Official Website, 2017).

In case of the contingencies, two heads have been created. One is the Guarantees and the other
one is the defamation. No amount has been shown under the head of the contingencies. The main
reason for showing the nil amount of guarantee is that no deficiency has been countered by the
company. Similarly for the defamation form of contingency no suit has been received by the
company from any of the party to the company.
Recognition Criteria and Measurement issues
Provisions - The provisions are valued and calculated using the discounted cash flow technique.
The discounted cash flow technique is applied to the expenditure which is calculated and
identified by the management using their best judgment. The discount rate which has been used
by the company is equivalent to the risk free rate of government or corporate bond rate. The
company has used the discount rate which is pre tax if the time value of money is important
(AASB, 2010). A provision for the dividend has not been calculated because of the fact that

dividend shall be recognized only when it is declared and informed to the Public and that too if it
is before the reporting date of the particular year.
Four types of provisions have been measured:
- Employee benefits covered under the head current liabilities includes the wages, salaries,
paid leave, annual leave and the leave for having the long service. These are measured at
the amount which is expected to be paid as and when the liabilities get settled. Employee
benefit liability covered under the head of current liabilities shall be paid and set off
within the period of twelve months. Any liability which is liable to be paid after the
period of twelve months have been classified as the Non current liability and includes
entitlements of the employees which includes the service leave which is long and the
related retirement benefits. Under this head, the bonuses have also been included for
which provision has been created and that too on the basis of the obligation that has been
generated on the basis of contract entered into with the employee.
- Restructure and Redundancy includes the amount charged for the payment of termination
benefits including gratuity, leave encashment etc and consultancy services. The benefits
of termination are payable only when the employee is terminated before the completion
of the employment or when an employee decides to have the voluntary retirement from
the services of the company.
- Property includes the good provision regarding the deferred lease incentives and onerous
lease provisions. Provision is recorded only when the decision is taken to vacate the
premises or else any excess capacity has been there.
- Other provisions include the defamation costs and other forms of costs which are as per
the nature of the business (Company Official Website, 2017).
Contingencies – There are two forms of contingencies. These are guarantees and defamation. In
case of the guarantees, it will be recognized only when the company and their controlled entities
face any class order for which the company is facing the deficiencies and defamation is
mentioned only when the group of the company or any single entity is sued in the ordinary
course of the business.

Argument for and Against for Inclusion of Contingency
The main argument in favor of the disclosing contingency items and amount and its nature is that
it helps in assessing the amount that the company would be liable to pay in case the contingent
situations that have been mentioned in actual occurs. In the given case, if the company receives
that one sister company has faced the situation where the company is liable to pay the guaranteed
amount to the financial institution due to the default on the part of the sister company then this
contingent liability which is show off the balance sheet will then be shown under the head of the
liabilities in the balance sheet and accordingly the payment will be done.
Similarly the argument in favor of the defamation case if any will be revolving.
The argument which is in against of the inclusion of the contingency item is of the defamation. It
is because; the defamation costs and the related expenditure cannot be identified as true and
correct. It is because of the nature of the item so disclosed as the contingency item. There are the
more chances only when the company is having the bad reputation of services but in the given
case the company has the good reputation in the market of Australia and New Zealand and thus
inclusion of the defamation in the contingent heads is not feasible.

Leased Items
As per note number 21 of the annual report of the company for the Financial year ending 25th of
June 2017, it is mentioned that under the major head of the Commitments, the company has
mentioned disclosed the operating lease as Lessor and Lessee.
Under both the options, the company has provided the amount under three subheads namely:
- Within one year
- Between one year to the year of five and
- More than five years
The company has shown the lease revenue under the head of the income in the statement of the
profit and loss. Also the leasehold improvements under the head of Property Plant and
Equipment as per the note number 14 of the annual report of the company (Company Official
Website, 2017).
Classification and Presentation of Leased Item
The company has classified and presented the lease item in accordance with Australian
accounting standards. The company has not adopted the provisions of the new accounting
standard 116 on leases. It is because the company will apply the same for the Financial year
ending 31st December 2019 or 25th of June 2020 due to kits application from the financial year
starting from 1st of January 2019 (Company Official Website, 2017).
The company has presented the lease revenue and the operating lease rentals in the statement of
the profit and loss and has shown the leasehold improvements as property under the assets side
and is charging the depreciation on the leasehold improvements in the statement of the profit and
loss (Arrozio, 2016). Also the company has shown the finance lease but the amount related to
that in the current financial year is zero.

Leased Items – Need to be Re classified
Reclassification occurs only when the terms and conditions of the particular arrangement gets
changed with the change in the use and application of the assets or related income generation
mode. In the given case the lease has been classified as the operating lease. In the annual report it
is mentioned that the leases have been classified as the operating lease because the all the risks
and the related ownership of the particular asset is transferred to the lessor and retains by him.
Currently the rental payments are charged to the statement of the profit and loss account on
straight line basis over the period of lease (Ely, 2015).
Therefore, if this item is reclassified and now its status will be of finance lease then the
accounting treatment will be different as the lease rentals will now not be charged to the
statement of the profit and loss as operating lease but will be classified as finance lease and no
depreciation will charged to the profit of the company. Depending upon the requirements of new
accounting standard, this item needs to be reclassified (Ma, 2011).
Valuation of Non Current Asset Item
Under the head of Noncurrent asset, the item Property Plant and Equipment has been selected.
As per note number 14 of the annual report of the company, the property plant and equipment is
valued at the cost less the amount of the accumulated depreciation or the amount of impairment
if any. Land has not been depreciated and the other assets have been depreciated in accordance
with the straight line method which allocates the amount over the useful life of the asset (AASB,
2010).

Argument for Alternative Valuation
The alternative method of valuation that can be adopted for the property plant and equipment is
the written down value method (AASB, 2011). Under this method the assets will be depreciated
using the specific rate as defined in the particular laws if any and charging the depreciation on
the written down value of the asset.
Conclusion
Financial statements shall give the true and fair view of the financial position and the financial
performance of the company. It shall be prepared in accordance with the provisions of the
accounting standards as applicable to the company. In this report, the main focus has been on the
recognition of the provisions, contingencies and the leased assets. Then the valuation of the
property plant and equipment has been discussed. In order to conclude the report, the accounting
standards shall be applied in the letter and spirit.
REFERENCES

Arrozio, M.M, (2016). “Changes in the financial ratios of the wholesale and retail sector
companies arising from the new accounting of the operating lease”. Revista Eniac
Pesquisa, 5(2), pp.139-159.
Australian Accounting Standard Board (AASB), (2010),"AASB 116 Property, Plant and
Equipments" available from
http://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07
-09.pdf accessed on 25-04-2018
Australian Accounting Standard Board (AASB), (2010),"AASB 137 Provisions,
Contingent Liabilities and Contingent Assets" available from
http://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf
accessed on 25-04-2018
Australian Accounting Standard Board (AASB), (2011),"AASB 108 Accounting Policies,
Changes in Accounting Estimates andErrors" Retrieved from
http://www.aasb.gov.au/admin/file/content105/c9/AASB108_07 -
04_COMPmay11_07-11.pdf accessed on 25-04-2018
Company Official Website, (2017), “Annual Report 2017”, available on
http://www.fairfaxmedia.com.au/Company/Corporate-Profile/corporate-profile accessed on
25/04/2018.
Ely, K.M., (2015), “Operating lease accounting and the market's assessment of equity
risk”. Journal of Accounting Research, pp.397-415
Ma W, (2011), “Impact on Financial Statements of New Accounting model for leases” available
at http://digitalcommons.uconn.edu/cgi/viewcontent.cgi?article=1194&context=srhonors_theses
accessed on 25-04-2018