King's Own Institute ACC201 Financial Accounting Report Analysis

This report examines the accounting treatment of contingent liabilities under AASB 137 and internally generated intangible assets under AASB 138, including impairment accounting as per AASB 136. The report begins with an executive summary outlining its aim and structure. Question 1 addresses accounting for contingent liabilities, defining them and explaining disclosure requirements, followed by a case study analysis of a lawsuit against Delta Ltd. Question 2 focuses on internally generated intangible assets, differentiating them from those acquired through business combinations, and discussing the reluctance of companies to change AASB 138, with reasons like inflating profits and investor perceptions. The report concludes with a reference and bibliography section, citing relevant sources. The report provides comprehensive coverage of the given topics, applying the AASB standards to the provided case study and offering insights into practical accounting considerations.

Running head: ACCOUNTING AND FINANCIAL MANAGEMENT
Accounting and financial management
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1ACCOUNTING AND FINANCIAL MANAGEMENT
Executive summary
Aim of the report is to focus on the accounting treatment of contingent liabilities in
accordance with AASB 137 and internally generated intangible assets as per AASB 138 and
impairment accounting on those assets as per AASB 136. The report will further focus on the
case study given in the task and will provide suggestions regarding its accounting treatment
as per the specified AASB.

2ACCOUNTING AND FINANCIAL MANAGEMENT
Table of Contents
Question 1..................................................................................................................................3
Answer (A).............................................................................................................................3
Answer (B).............................................................................................................................3
Question 2..................................................................................................................................4
Answer (A).............................................................................................................................4
Answer (B).............................................................................................................................4
Answer (C).............................................................................................................................4
Reference and bibliography...................................................................................................5

3ACCOUNTING AND FINANCIAL MANAGEMENT
Question 1
Answer (A)
Accounting for contingent liabilities in accordance with AASB 137
Contingent liability is the plausible obligation that generates owing to past events and
the existence for which is confirmed only through non-occurrence or occurrence of one or
more than one future uncertain events that is not within the control of the organisation
entirely or it is the present compulsion that generates owing to past events and not recognised
as the requirement outflow of the economic resource for settlement of the obligation is not
probable or it is not possible for measuring the compulsion amount with adequate reliability
(Aasb.gov.au, 2019)
In accordance with AASB 137, an organisation shall not disclose the contingent
liability rather it is disclosed unless probability of outflow of the resources associated with
economic benefit is very less. In case where the organisation is severally and jointly liable for
any commitment, part of the obligation expected to be fulfilled by the other party is
considered as the contingent liability. However, for the other part obligation for the part for
which the resource outflow is probable that part shall be disclosed as contingent liability
(Aasb.gov.au, 2019). Only exception is that under circumstance that is extremely rare where
reliable estimate cannot be made. Contingent liability may be developed in the way that was
not expected initially. Hence, they are assessed ob continuous basis for determining whether
the outflow of the resources associated with economic benefit has become apparent or not. If
the likelihood becomes apparent that the outflow of economic benefits will be required for
any item that was previously considered and treated as the contingent liability, provision for
the same item is recognised under the financial statement for the period to which the change
in the likelihood takes place (Aasb.gov.au, 2019)
Answer (B)
In the given case one of the customer of Delta Ltd filed lawsuit regarding damage and
costs that owing to the failure of Delta Ltd’s one of the product. The customer claimed $ 3
million as damage. Though, the lawyer of Delta Ltd advised the claimed amount by the client
is extortionate and Delta Ltd has fair chance of winning the case, in case the company lose
the case, it will have to pay an amount of $ 500,000 as damage.
Present obligation on account of past events – here the obligating event is failure of the one
electrical product sold to the customer by Delta Ltd. It gives rise to the obligation that the
client suffered damage owing the failure of Delta Ltd’s product and the claim raised by the is
valid (Aasb.gov.au, 2019)
Outflow of economic resources on account of settlement of claim – though the lawyer of
Delta Ltd advised that the claimed amount by the client that is $ 3 million is extortionate and
Delta Ltd has fair chance of winning the case, in case the company lose the case, it will have
to pay an amount of $ 500,000 as damage (Aasb.gov.au, 2019)
Conclusion – contingent liability for an amount of $ 500,000 shall be disclosed by the entity
for the financial statement on 31st December 2018 as the confirmation of losing or winning
the case has not yet been established.

4ACCOUNTING AND FINANCIAL MANAGEMENT
Question 2
Answer (A)
Internally generated intangible asset
Sometimes it is not easy to assess whether the intangible asset that is internally generated
qualifies for the purpose of recognition. These is because of the issues like –
 Recognising whether there is an identifiable assets and when the asset will generate
the expected economic benefits in future and
 Determination of the asset’s cost reliably (Aasb.gov.au, 2019)
Cost of the internally generated intangible asset is total of expenditures that is
incurred from date when it first met the criteria for recognition. It includes all the cost
required for creating, preparing and producing the assets for the purpose of intended use.
However, internally generated publishing title, mastheads, brand generated internally shall
not be recognised as the intangible asset (Aasb.gov.au, 2019)
While assessing whether the intangible asset is impaired the organisation applied the
requirement of AASB 136. Intangibles are tested annually for impairment through comparing
the carrying value with the recoverable value. It can be conducted any time during the year
and shall be carried out at same time for each year (Aasb.gov.au, 2019)
Answer (B)
Intangible asset acquired through business combination is reported at fair value at the
date of acquisition. If the same assets acquired through business combination can be
separated or the asset arises from legal rise, adequate information exists there to measure the
assets at fair value. On the contrary the internally generated assets are valued at cost. Value of
the same assets is determined through capitalising the part of costs incurred during the
process of production. However, internally generated goodwill shall not be reported as asset
as it is not a source that is identifiable (Aasb.gov.au, 2019)
Answer (C)
Companies are reluctant for the changes in AASB 138 due to the below mentioned reasons –
 To inflate the future profits – where the entity written – off large amount in
investment on account of development and research this provides guarantee that the
future earnings and revenues that will be generated from this acquisition will be
balanced through major expenses items, the amortisation of intangible assets. Impact
on the ratio including rate of the return on the assets as well as equity will be better in
case the future write-offs take place instead of the periodic amortisation in the later
period (Russell 2017)
 Write-offs are considered by the investors as the one time item – number of the large
hits are considered as better under onetime adjustment rather than the periodic
amortisation. Impact of onetime write-offs is discounted by the investors and they are
happy about the improved profitability for the later years (Russell 2017)

5ACCOUNTING AND FINANCIAL MANAGEMENT
Reference and bibliography
Aasb.gov.au. (2019). [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPjun14_04-14.pdf
[Accessed 18 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 18 May 2019].
André, P., Dionysiou, D. and Tsalavoutas, I., 2018. Mandated disclosures under IAS 36
Impairment of Assets and IAS 38 Intangible Assets: value relevance and impact on analysts’
forecasts. Applied Economics, 50(7), pp.707-725.
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].
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Russell, M., 2017. Management incentives to recognise intangible assets. Accounting &
Finance, 57, pp.211-234.
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.