Financial Accounting Assignment: AASB Compliance and West Ltd

This financial accounting report analyzes the case of West Ltd, a leader in the frozen and canned fish sector, focusing on two primary issues: the recognition of intangible assets related to its environmentally responsible practices and the treatment of a guarantee offered for potential damage to the ship Steve Irwin. The report examines whether West Ltd can recognize its enhanced environmental reputation as goodwill under AASB 138, considering the criteria for intangible asset recognition. It concludes that, while the company's efforts may enhance its brand value, the uncertainty surrounding the timing and extent of increased customer base and revenue generation prevents the recognition of goodwill. Furthermore, the report addresses the classification of the guarantee for the Steve Irwin ship, determining whether it should be treated as a provision or a contingent liability under AASB 137. The analysis considers the likelihood of damage occurring and the ability to reliably estimate the amount of potential obligation, ultimately guiding the appropriate accounting treatment.

Running head: FINANCIAL ACCOUNTING ASSIGNMENT
Financial accounting assignment
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Executive summary
West Ltd that is the leader in the sector of selling frozen and canned fish product always markets
that it conducts its operation in a manner which is environmentally responsible. It is expected
that the entity’s efforts will improve its reputation regarding accountability towards environment
and hence, the entity can recognize the same as goodwill in its book of accounts. The report will
discuss whether the same can be recognised as goodwill or not. Further, the report will deal with
treating as provision or contingent liability on account of the guarantee offered by it for any
damage that may take place for Steve Irwin, the ship that is engaged in disrupting whalers in
southern oceans.

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Table of Contents
Introduction......................................................................................................................................3
Findings...........................................................................................................................................3
Issue 1 – intangible assets............................................................................................................3
Issue 2 – recognition of provision or disclosing contingent liability...........................................4
Conclusion and recommendation....................................................................................................6
Reference.........................................................................................................................................7

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Introduction
Dealing with the frozen fish products West Ltd is the leader in this sector and is involved
in selling the same under 2 brand names as Arctic Fish and Tropical Taste. Tropical Taste is
involved in selling the fish caught from the northern oceans whereas Arctic Fish involved in
selling the fish caught from southern Australian water. The brand Tropical Taste is originally
developed by the entity named as Fishy Tales that is afterwards West Ltd acquired with all assets
and liability of Fishy Tales. Different issues those will be dealt with in the report is the issues in
contradiction or in compliance with the AASBs (Hendrickson, 2014).
Findings
Details provided for West Ltd majorly highlights 2 issues – recognition of intangible
asset in compliance with AASB 138 on account of enhancing environment reputation and
recognition of the contingent liability in compliance with AASB 137 - Provisions, Contingent
liabilities and Contingent assets on account of provision of guarantee to repair the damage, if any
takes place to the ship Steve Irwin.
Issue 1 – intangible assets
Details provided in the case study of West Ltd that is the leader in the sector of selling
frozen and canned fish product always markets that it conducts its operation in a manner which is
environmentally responsible. Apart from that the entity also campaigned in past times that it
assures dolphins will be impacted by their tuna fishing activity. Owing to the same public
considers the entity as dolphin friendly. Further, it was stated by the entity’s marketing manager
that the efforts of the entity will improve the reputation in context of social responsibility as it
assured to repair damages, if any caused to ship Steve Irwin that is engaged in stopping the
whaler’s efforts where it expects that it will do the same successfully in southern oceans
(Goodwin, et al., 2016). It is expected that the entity’s efforts will improve its reputation
regarding accountability towards environment and hence, the entity can recognize the same as
goodwill in its book of accounts.
AASB 138 outlines the criteria for recognising the intangible asset. Under Para 8 of
AASB 138 it is stated that intangible asset is identifiable however its nature is non-monetary and
does not exist physically. To recognise an asset as intangible asset, Para 9 to 17 of AASB 138
stated different criteria as – the asset is required to be recognizable, it shall meet the intangible
asset’s definition, the item must be identifiable, future economic benefit associated with the asset
will be generated to the entity and the control on the asset is held by the entity. Asset is
accounted as the held under the control of entity if the entity is entitled to receive the benefit to
be generated from the assets in the coming period and have the power to restrict other parties in
gaining the said benefit (AASB 138 - Intangible Assets, 2015). Further, the asset will be
considered as identifiable if the same can be identified separately from the entity and can be
given on rent, can be sold, exchanges for other assets, licensed or transferred to any other party.
However, the intangible asset cannot be recognized by any entity until it is confirmed that the
economic benefit or the upcoming period associated with the asset will be received by the entity.
In addition, to recognise the intangible assets its value can be determined reliably (Yallwe and
Buscemi, 2014). In accordance with AASB 138, if the organization expensed something for
gaining the benefit from the asset but in the financial report of the organisation the same cannot

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be recognised as intangible asset owing to the reason that it could not fulfil the criteria of
recognition the same is accounted for as the goodwill created internally. As internally created
goodwill cannot be separated, does not belong to any recognizable source and is not created on
account of contractual obligation or legal rights its value cannot be determined reliably (AASB
138 - Intangible Assets, 2015). Further, to recognise intangible assets in financial reports of any
entity the asset must be capable of increasing the value of the entity though enhancing its
customer base, public reputation or brand value. Given details for West Ltd suggests that the fact
of enhancing the reputation of the entity through acting in environmentally responsible manner
the brand value of it will increase which in turn is capable of increasing its customer base. It can
also be considered that the same will enhance the brand value of the entity and hence, the same
can be accounted for as goodwill in the financial record of the entity (Vetoshkina, and
Tukhvatullin, 2014). However the one of the most important criteria for accountability is though
the customer base will be increased that will generate higher level of revenues for the entity
assurance level regarding how much time it will take to increase the customer base as well as
revenues for the entity is significantly low. Hence, instead the fact that the marketing manager is
in the view that the engaging in activities like acting in environmentally responsible manner will
enhance its public image through creating goodwill, how much value can be generated and at
what time are not sure. Hence, the same will be accounted as internally created goodwill for
West Ltd and hence, it does not meet the recognition criteria of goodwill in the financial records
of the entity. Therefore, West Ltd shall not recognize this goodwill as intangible assets in its
financial records (AASB 138 - Intangible Assets, 2015).
Issue 2 – recognition of provision or disclosing contingent liability
In addition to above mentioned issue regarding recognition of intangible asset another
issue that can be found out from the given case study of West Ltd. This is treating as provision or
contingent liability on account of the guarantee offered by it for any damage that may take place
for Steve Irwin, the ship that is engaged in disrupting whalers in southern oceans (Gamayuni,
2015). It can be made out from the case study that West Ltd that is considered as dolphin-
friendly has offered guarantee if any damage take place for Steve Irwin while it disrupting
whalers. AASB 137, Para 10 states that contingent liability is (i) the expected obligation that
may take place on account of past events; In addition, existence of the obligation can be
validated on the basis of occurring or non-occurring of any or more undecided event in coming
period on which the entity does not have full control or (ii) present obligation of past event
cannot be reported if certainty is not there on account of outflow of economic resources that may
require for settling up obligation or the amount required for the same cannot be determined
reliably (AASB 137 - Provisions, Contingent Liabilities and Contingent Assets, 2015). On the
contrary, provision has been defined by Para 10 of AASB 137 as obligation for the even for
which the amount and timing is uncertain. AASB 137, Para 12 stated that in general terms all the
provision shall be considered as contingent as the associated time or value is not certain.
However, in accordance with AASB 137 contingent idiom is used on account of the assets or
liabilities those could not be recognised as provision as their existence was not sure as the same
can only be validated on the basis of occurring or non-occurring of any or more undecided event
in coming period on which the entity does not have full control. In addition, the phrase
contingent liability is used on account of the liabilities those could not be recognised owing to its
failure to meet recognition criteria (AASB 137 - Provisions, Contingent Liabilities and
Contingent Assets, 2015).

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AASB 137, Para 13 stated out the divergence among contingent liability and provision as
below –
Contingent liabilities – contingent liabilities are refrained from reporting as liability as either (i)
they are the obligation which are already in existence but fail to meet the criteria for recognition
in accordance with AASB 137 as it is unlikely that economic resource outflow will be required
to settling up the obligation or projecting the total amount of obligation cannot be determined
reliably, or (ii) likely obligation is there as the same has not yet been curtained on account of
whether they are the obligation which are already in existence that will require economic
resource outflow to settling up the obligation (AASB 137 - Provisions, Contingent Liabilities and
Contingent Assets, 2015).
Provision – it can be reported as liability in addition with assumption that the projections can be
reliably determined as they are the obligation which are already in existence and likelihood is
there the same will require economic resource outflow to settling up the obligation (AASB 137 -
Provisions, Contingent Liabilities and Contingent Assets, 2015).
If decisive factor for recognition is taken into consideration, it can be stated that
provision must meet the recognition criteria to be reported as below –
 The firm must have the obligation in existence arising out of legal or constructive on
account of any event that has taken place in past period.
 It is certain that the entity will require economic resource outflow to settling up the
obligation.
 Value of the obligation can be determined reliably (AASB 137 - Provisions, Contingent
Liabilities and Contingent Assets, 2015)
If it is found out that all the criteria mentioned above are not met the entity shall not
recognize the provision on account of the event.
If the contingent liability is to be recognised, it must fulfil different criteria as follows –
 Likelihood that the entity will require economic resource outflow to settling up the
obligation is substantial
 In case the entity is individually as well as in association is accountable for obligation,
that part which is to be fulfilled by other party are considered as contingent liability
(AASB 137 - Provisions, Contingent Liabilities and Contingent Assets, 2015)
Any event that has taken place in past period is accounted for as obligating event. In rare
cases it is imprecise that whether any obligation is there in existence or not. However, in any
such cases the event taken place in past period is considered to generate any obligation for the
present period if after taking into account all the available evidences, it is considered that no
obligation is there in existence at the time while the books of accounts are closed by the entity.
To recognise any liability in existence is not sufficient, in addition there must be certainty that
the entity will require economic resource outflow to settling up the obligation (AASB 137 -
Provisions, Contingent Liabilities and Contingent Assets, 2015). Though in case of West Ltd it
has offered guarantee for any damage that may take place for Steve Irwin, the ship that is
engaged in disrupting whalers in southern oceans, however, it does not provide any assurance
that the damage will take place for sure. Even if the damage take place, its timing as well as

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value is not determinable. Hence, considering the fact, West Ltd shall disclose the same as
contingent liability in note to accounts. In case the damage actually takes place and the entity
requires economic resource outflow for repairing the damage, it shall be reported as provision in
the financial report. The entity shall continue reporting the same as provision until the value of
expense is determined. Once, the value is determined it shall be charged as expense in income
statement (Aasb.gov.au, 2018).
Conclusion and recommendation
Considering above discussion it is concluded and recommended that West Ltd shall
account the activities carried out in environmentally responsible manner as internally created
goodwill and hence, it does not meet the recognition criteria of goodwill in the financial records
of the entity. Therefore, West Ltd shall not recognize this goodwill as intangible assets in its
financial records. Further, In case the damage actually takes place for which it provided
guarantee where the entity requires economic resource outflow for repairing the damage, it shall
be reported as provision in the financial report. As of now the same shall be reported as
contingent liability.

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Reference
AASB 137 - Provisions, Contingent Liabilities and Contingent Assets., 2015. AASB Standard.
Available at:http://www.aasb.gov.au/admin/file/content105/c9/AASB137_08-15.pdf[Accessed
11 Sept 2019].
AASB 138 - Intangible Assets., 2015. Compiled AASB Standard. Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-
18.pdf[Accessed 11 Sept 2019].
Aasb.gov.au., 2018. [online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf
[Accessed 11 Sept 2019].
Gamayuni, R.R., 2015. The effect of intangible asset, financial performance and financial
policies on the firm value. International journal of scientific & technology research, 4(1),
pp.202-212.
Goodwin, J., Atilgan, Y., Simsir, S.A. & Ahmed, K., 2016. Investor reaction to accounting
misstatements under IFRS: Australian evidence.
Hendrickson, J.R., 2014. Contingent liability, capital requirements, and financial reform. Cato
J., 34, p.129.
Vetoshkina, E.Y. and Tukhvatullin, R.S., 2014. The problem of accounting for the costs incurred
after the initial recognition of an intangible asset. Mediterranean Journal of Social
Sciences, 5(24), p.52.
Yallwe, A.H. and Buscemi, A., 2014. An era of intangible assets. Journal of Applied Finance
and Banking, 4(5), p.17.