Financial Accounting and Reporting: Intangible Assets and Liabilities

This financial accounting report, prepared for Pewter Ltd., addresses key issues related to intangible assets and provisions, and contingent liabilities. The report, written by an accountant at McKenzie and Associates, analyzes the company's environmental responsibility efforts and the accounting treatment of goodwill under AASB 138. It differentiates between internally generated goodwill and recognized intangible assets, emphasizing the challenges in reliable measurement. Furthermore, the report examines contingent liabilities and provisions under AASB 137, clarifying when a guarantee should be disclosed as a contingent liability versus recognized as a provision. The report concludes by referencing relevant accounting standards and provides a detailed analysis to guide Pewter Ltd. in its financial reporting practices.

Running head: FINANCIAL ACCOUNTING AND REPORTING
Financial accounting and reporting
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Table of Contents
Response to issues 1 – Intangible assets....................................................................................4
Response to issue 2 – Provisions and contingent liabilities.......................................................5
Reference....................................................................................................................................7

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668 George Street,
Melbourne, VIC 3000
Telephone [phone]
www.mckenzieandassociate.com.au
12 May 2018
Mr. Con Pewter
The managing Director
Pewter Ltd.
Level 6, 510 King William Street,
Brisbane QLD 4000
Dear Mr Pewter
Thank you for your response through e-mail. I am working as an accountant with McKenzie
and Associates. Manager of the company Ms Maria McKenzie has asked me to reply your
email through a letter. As per my understanding the issues mentioned by you are related to –
 Intangible assets
 Provisions and contingent liabilities
As the company always provided their clients with various suggestions for making decisions
as per the compliance of IFRS, AASB and the Corporation Act 2001, we would like to assure

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you that we will provide you with the best possible recommendation for accounting treatment
of the issues raised by you.
In case of any query, questions or doubts regarding the accounting treatment mentioned
above, feel free to contact me through our official mail address or contact number.
Yours sincerely
Ms Emily Edwin
Accountant
McKenzie and Associates
Copy Elle Jordan
Enc: Responses to issues
Cc: Maria McKenzie

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Response to issues 1 – Intangible assets
The issue mentioned by you regarding the strengthening the environment and record it in the
financial statement of the company is related to AASB 138 on Intangible assets (Aasb.gov.au,
2018). An intangible asset is the non-physical assets that have the useful life of more than one
year. Goodwill of the business is the intangible asset that is owned and associated with
company’s operation. Goodwill enhances the value of the company through increasing its
brand value, customer base, location, products, reputation and workforce that may have
proven track record of creating income for the company. One of the main factors considered
as the goodwill of the company is enhancement of the future economic benefits (Beams,
Brozovsky & Shoulders, 2017). As per the details provided by you the action of the company
regarding the efforts of Steve Irwin will strengthen the environmental responsibility image
through providing the guarantee of repairing the damage, if any. Therefore, it can be expected
that this action will attract more customers in the long run period and will ensure the
company’s long term sustainability (AASB 138 - Intangible Assets, 2015). However, in some
instances though the expenditure is spend for generating the future economic benefit, it does
not meet the recognition criteria required to be recognizes as an intangible asset. These kinds
of expenses are known as internally generated goodwill. The internally generated goodwill is
not identified as the asset as it is not recognizable source that is it cannot be segregated.
Further, it does not arise from the legal rights or contractual obligation that is controlled by
company and its cost cannot be measured reliably. The main issues in recognizing the
internally generated goodwill as the intangible assets is identification of when and whether
the recognizable asset will generate the economic benefits and recognition of the asset at
reliable cost (AASB 138 - Intangible Assets, 2015). Further, in some instances cost required
for enhancing or maintaining the internally generated goodwill cannot be segregated from the

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cost required for daily operation of the business. In the given case, as per the view of
marketing manager the environmental reputation will enhance the image of the company.
However, the amount of economic benefits that will be generated through this cannot be
measured reliably and there is no surety of when and whether it will generate the benefit
(AASB 138 - Intangible Assets, 2015). Therefore, the goodwill will be regarded as internally
generated goodwill and will not be recognized in the financial statement of the company as
intangible asset.
Response to issue 2 – Provisions and contingent liabilities
As per AASB 137 on Provisions, contingent liabilities and contingent assets, the contingent
liability is the expected obligation that may arise from the past events and the existence of the
liability will be established only upon non-occurrence or occurrence of 1 or more than 1
tentative future event that is not in control of the company (AASB 137 - Provisions,
Contingent Liabilities and Contingent Assets, 2015). The contingent liability is not
recognized under the financial statement if the amount of obligation cannot be measured
reliably. The contingent liability shall be disclosed through notes to account except where the
possibility for economic resource outflow is remote (Sinclair & Keller, 2014). On the other
hand, the provisions are the liability different from other liabilities like accruals or trade
payables as under provisions there is uncertainty regarding the amount and timing of the
payment for settlement of the obligation (Goodwin et al., 2016). The main difference of
provision with contingent liability is that the possible obligation under contingent liability is
yet to be authenticated regarding whether the obligation will lead to outflow of the economic
resources. Here in the stated situation the guarantee provided by Pewter Limited on account
of occurrence of any damage shall be disclosed as contingent liability through the notes to the
financial statement as it has not yet confirmed as an obligation and therefore the outflow of

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economic resources are not yet confirmed. However, on confirming of the obligation if the
company on account of providing guarantee it shall be recorded as provision in the financial
statement if the amount and timing of payment is not confirmed (AASB 137 - Provisions,
Contingent Liabilities and Contingent Assets, 2015). If the amount of the obligation and
timing of payment is confirmed then it shall be recorded as an expense in the income
statement and it will reduce the profit of the company.

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Reference
AASB 137 - Provisions, Contingent Liabilities and Contingent Assets. (2015). AASB
Standard. Retrieved from
http://www.aasb.gov.au/admin/file/content105/c9/AASB137_08-15.pdf
AASB 138 - Intangible Assets. (2015). Compiled AASB Standard. Retrieved from
http://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-
18.pdf
Aasb.gov.au. (2018). [online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-
18.pdf [Accessed 12 May 2018].
Beams, F. A., Brozovsky, J. A., & Shoulders, C. D. (2017). Advanced accounting. Pearson.
Goodwin, J., Atilgan, Y., Simsir, S.A. & Ahmed, K. (2016). Investor reaction to accounting
misstatements under IFRS: Australian evidence.
Sinclair, R.N. & Keller, K.L. (2014). A case for brands as assets: Acquired and internally
developed. Journal of Brand Management, 21(4), pp.286-302.