Financial Accounting Report: Contingent Liabilities and Provisions

This financial accounting report addresses contingent liabilities, provisions, and intangible assets, offering recommendations based on the Corporation Act 2001 and AASB 137. The report analyzes a scenario involving Beachlife Ltd., examining a sales contract with Goodsports Ltd. It details the accounting treatment for sales revenue, maintenance agreements, and potential liabilities, differentiating between provisions and contingent liabilities. The analysis includes the recognition of intangible assets and the implications of valuation by directors. The report provides practical guidance on financial statement presentation and the importance of continuous evaluation of contingent liabilities for economic benefits. The report also highlights the importance of recognizing provisions for current legal and constructive responsibilities. The report also presents the need to show maintenance amounts as contingent liability. The report concludes with a summary of the key issues and recommendations for managing financial accounting practices effectively.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student
Name of the University
Author Note

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FINANCIAL ACCOUNTING
718 Geelong Street
Melbourne, VIC 3000
Telephone [phone]
www.magentaandassociates.com.au
19 January 2018
Mr. Christopher Sampson
The managing Director
Beachlife Ltd.
Level 7, 927 William Street
Brisbane QLD 4000
Dear Christopher,
We are obliged to get a response from you and we would also like to express our gratitude for
getting back to us with your concern. We are extremely obliged that you have contacted us while
considering us to be capable enough for helping you in your decision- making process by
providing you with the best possible solutions available. Similar to our previous deals, we would

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try our best to satisfy your needs by providing you with the best possible solutions with respect
to the issues that are detected in the accounting along with the problems faced by you, which you
have mentioned in the e-mail. We shall provide you with the recommendations while keeping
into consideration the Corporation Act 2001, AASB and its elucidation shall be in accordance
with the problems of accounting, which are mentioned by IFRS.
We consider that you are familiar with the aspect that contingent liabilities are referred to as
those liabilities, which usually have probable losses that might occur in the future as a result of
the happening or non- happening of a certain event or even as a result of some particular
outcome. There are several real life examples that can be linked with the contingent liabilities.
Some of them are research related to some of the major organizational failures that are pending
till date, legal claims and the warranties provided to the clients on purchase of the products1. It is
necessary to show the contingent liabilities in the financial statements of the organization along
with recording the amount previously estimated by the organization in its annual sheets. This
amount is kept separate as a reserve for the organization to be used in situations where the
company might want to prevent the situation in the future. As per the Para 123 of AASB 137,
contingent liabilities can be identified along with the chief accountability and the major reasons
for the outflow of the organizational resources such that the economy of the organization can
derive benefits and can possibly solved under those accountability or responsibility. As per the
Para 29, it has been identified that it is the liability of the organization to treat the responsibilities
as contingent liability. The contingent liabilities have to be ascertained by the organization well
in advance and cannot be determined by the organization that the liabilities shall definitely occur
in the financial year. Thus, the detailed evaluation the contingent liabilities has to be a
1 Gamper, Catherine, et al. "Managing disaster-related contingent liabilities." (2017).

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continuous process such that the organization can determine the outflow of the resources that
shall enable the organization to obtain benefits for improving the organization’s economy.
Similarly, it is necessary to recognize the provisions that already exist within the organization
such that the current responsibilities, both legal and constructive arising from the previous events
can be accurately estimated and the required amount can be set aside for it. The basic aim for the
provision is to adjust it appropriately with the current year’s balance, which shall enable the
organization to consider the costs that is a part of that particular financial year and maintaining
the status of the finances that have previously been considered such that they can be accounted in
that financial year.
Thus, despite the utilization of provision within the organization seems to be a type of saving in
the first look, it does not imply to be a type of saving for the organization. Contingent liability is
usually mentioned under the heading of income statement in the balance sheet and is located in
the bracket of expenses. Additionally, the major distinguishing factor between provision and
contingent liability is that the provisions are shown in the financial statements whereas, the
contingent liabilities are recorded in the financial statements of the organizations under the
heading of liabilities2. On the other hand, in cases when the probable liabilities are expected to be
high somewhere around 60 to 90 percent, the liabilities are placed under the heading of provision
in the organization’s financial statements. On the contrary, if the amount of liability lies between
five percent to 60 percent, the liability is recorded in the financial statements as notes. In cases
when the liability is less than five percent, the organization becomes incapable of taking any
actions regarding it.
2 Hendrickson, Joshua R. "Contingent liability, capital requirements, and financial reform." Cato J. 34 (2014): 129.

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Thus, keeping into consideration the AASB 137 in the Provisions, the Contingent assets and
liabilities have been mentioned as the major issue in the e-mail. In response to the issue, we can
suggest that the intangible assets must be mentioned in the balance sheet. This shall help in the
vital amortization and shall also help in its recognition. In this particular case, it has been
identified that the organization possesses an asset that amounts to $ 800,000 as on 30th June
2018. This has been recognized in accordance with the valuation provided by the organization’s
directors. This indicates that the organization is required to make certain changes in its policy in
accordance with the current happenings such that it becomes easier to recognize the accounting
along with the costs, which are capable of being developed by an internal basis. Additionally, the
intangible assets of the organization are required to have a life that shall enable the process of
amortization within the duration for which the assets were used. Therefore, it is possible to
realize this amount with the amortization process and it can be reported at the cost of $ 800,000,
which can be further applied with the residual value of the assets.
While considering the second case, it has been identified that Beachlife Ltd has entered into a
sales contract with Goodsports Ltd as on 1st December 2017 and with an amount of $ 90000. On
the basis of this amount, the payments were made as on 30th December 2017. At last, the
equipment was delivered by the organization on 10th December 2017. As per the sales contract,
Goodsports Ltd had offered a clause of maintenance for that equipment, which was applicable
for the first first year after the purchase was made by the concerned company. The company had
fixed the maintenance amount and the amount was a value of $ 7500. On the other hand,
Goodsports Ltd was not happy with the task of maintenance, which was provided by the
organization as it was liable to pay 15 percent of the price paid. This amount summed up to be $
90000* 15 percent, which is equals to $ 13500. Thus, in the present situation, it has been

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identified that Beachlife Ltd is required to show an amount of $ 90000, which has been recorded
under the heading of income as sales for the sale of the equipment. This was because the
organization received the amount in that particular year that is 31st December 20173.
Additionally, the maintenance amount that summed up to be $ 7500 has to be shown as
contingent liability in the balance sheet as well as in the statement of income under the heading
of provision for the estimated amount. The amount of $ 13500 has to be mentioned as notes in
the organization’s financial statement under the heading of contingent liability because this
liability is not of probable nature.
In case you come across any issues or doubts related to the suggestions provided by us, please
feel free to contact us by the means of telephonic call or via e- mail.
Yours sincerely
Ms. Lisa Magenta
Manager
Magenta and Associates
Copy Emily Thompson
Enc Letter Writing Handout
3 Picker, Ruth, et al. Applying international financial reporting standards. John Wiley & Sons, 2016.

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Reference List
Gamper, Catherine, et al. "Managing disaster-related contingent liabilities." (2017).
Hendrickson, Joshua R. "Contingent liability, capital requirements, and financial reform." Cato
J. 34 (2014): 129.
Picker, Ruth, et al. Applying international financial reporting standards. John Wiley & Sons,
2016.