Financial Accounting and Reporting: Issues and Analysis Report

This report, prepared for Kaplan Business School's ACCM4200 Financial Accounting and Reporting course, addresses key accounting issues raised by a client, Escape Ltd. The report, structured as a letter, examines the differences between revaluation and impairment of assets, as well as the distinctions between liabilities, provisions, and contingent liabilities. It delves into the specific requirements for asset impairment and revaluation, considering factors such as fair value, market value, and disposal costs. The report also clarifies the definitions and accounting treatments of liabilities, provisions, and contingent liabilities, referencing relevant accounting standards like AASB 136 and IAS 37. The author concludes that the revaluation of assets can lead to impairment if the fair value differs from the asset's fair value. This report provides a comprehensive overview of these crucial financial accounting concepts, offering valuable insights into their practical application.

Running head: Financial Accounting and Reporting
Financial Accounting and Reporting
Name of the Student:
Name of the University:
Author Note:

1FINANCIAL ACCOUNTING AND REPORTING
67 Grenfell Street
ADELAIDE 6A 6000
Telephone [phone]
www.kbs.com.au
22 January 2022
To,
The Board of Directors
55 Assignment Street
WORKDON 6A 6000
Dear Sir/Madam,
This is to inform that Kaplan has always provided its students with a quality education. For this
reason, we would like to introduce some financial accounting and reporting topics for assistance.
The discussion is below.
Every entity has to follow different rules and accounting laws to form their annual report. The
annual report contains the balance sheet of that entity for the specific year and the values of the
assets and liabilities revalued and impairment. The assets and liabilities revalued, and the assets
are impairment. The difference between liabilities, contingent liabilities and provisions are
discussed below in detail. The difference between revaluation of assets & liabilities and
impairment of assets is also discussed below in detail.

2FINANCIAL ACCOUNTING AND REPORTING
Issue 1
There is a minimal difference among revaluation and impairment of assets. But both of them
start with the evaluation of liabilities and assets to identify their fair value of assets and
liabilities. Then the next step involves taking required action for updating accounting books
(Compare the Difference Between Similar Terms 2020). However, the major difference of both
of them is that revaluation can be done on both sides that is the value of assets can increase to the
market value (moved upwards) or the value of assets can decrease (moved downwards).
According to AASB 136, the impairment of the assets can be done only from one side that is
either the calculation can be done for upward movement or the downward movement
(Aasb.gov.au 2020).
As per AS 28, impairment of assets needed at every year-end whenever there will be a decline in
the value of the assets due to any external factor or internal factor (Cleartax.in 2020).
Revaluation of assets done for every tangible asset as well as for intangible assets (Debitoor.com
2020). Revaluation of assets is needed when there will be the sale of the assets, increment in the
market value of the assets, before acquisition or merger by other company and ensuring that
enough fund is available by the company.
Impairment of the assets is done by the enterprises along with the revaluation of assets because
the enterprise makes sure that the asset’s carry forward amount should never differ from their
fair value. However, it is important to carefully identify whether revalued assets are needed to be
impaired or not. The following requirements are required to check:
When the fair value of that asset is similar with the market value of that asset, then fair value
should differ from net selling price of that asset by direct incremental cost which will result in

3FINANCIAL ACCOUNTING AND REPORTING
disposing of asset. Now, if there is any possibility of disposal cost being negligible and also
recoverable amount is greater or closer to the revalued amount, then revalued asset cannot be
impaired. Whereas, if disposal cost is unable to be negligible, then the net selling price will be
lesser than fair value, then there is a possibility for the revalued asset to be impaired.
When the fair value of the asset gets determined differently apart from the market value, then the
revalued amount of that asset can be lower or greater than recoverable amount. Here is also a
possibility for the revalued asset being impaired.
Revaluation of liabilities is also done when the market value of that liability increases or
decreases. To show the increment or decrement for the liability value in balance sheet,
revaluation is done for the liability. The revalued profit or loss is transferred to the capital
account.
However, as per IAS, 36 impairment is only done when there will be a massive reduction in
recoverable amount of any asset and no liability (Iasplus.com 2020).
Issue 2
Liabilities are considered as the obligations of an organization to benefit other organizations as
result of the past economically. It is also called future sacrifice mad by organizations and this
account is noted in the balance sheet and presented at the year-end. Provisions is the amount that
the organization keeps aside to settle any future liability or any decrease in value of the asset and
even after all the settlements, the actual amount will still be unknown. Contingent liabilities are
known as one of the potential liabilities which may occur as a result of some uncertain future
event. If contingency amount is more likely and its liability is estimated reasonably then the
contingency liability is supposed to get recorded in accounting records of the entity (Toppr-
guides 2020).

4FINANCIAL ACCOUNTING AND REPORTING
The main difference between liability and contingent liability is that liability is the amount that
the entity already owes to other entity and contingent liability is the amount that the entity could
owe in future to other entities depending on the frequency of the events transpire. Provision is a
part of liability. Provision is not recognized until and unless the present obligation of the entity is
not probable that resource outflow in the future requires settlement of that obligation and that
amount will be measured with enough reliability (Compare the Difference Between Similar
Terms 2020). The contingent liabilities are mainly recorded at present so that there will be the
possibility of future fund outflow and provisions are accounted at present which are actually the
result of some past event. The amount of the reasonable estimate of provision is highly uncertain
whereas the reasonable estimate of contingent liability is made for the amount of payment.
According to IAS 37, contingent liabilities and provisions are similarly done for the purpose of
matching the assets and liabilities against the income and expenses for a specific financial year
(Iasplus.com 2020).
Form the above discussion; it can be concluded that the revaluation of assets can again be
impairment when the value of assets is different from the fair value of assets. However,
impairment is only done for the assets. Tangible assets are needed to be impairment whenever
required. The difference between liabilities, provisions and contingent liabilities are very few as
provision and contingent liability are the part of liabilities only. Liability is an obligation of the
entity for the future, provisions are the amount of money which the entity keeps aside for
meeting the future liability and contingent liability are the uncertain liabilities when occurred
from future events.
If you have questions regarding the discussed points, please do not hesitate to contact me.

5FINANCIAL ACCOUNTING AND REPORTING
Yours sincerely
Joseph Green
Academic Director
Kaplan Business School
References:
Aasb.gov.au 2020. [online] Aasb.gov.au. Available at:
https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf
[Accessed 22 Jan. 2020].
Cleartax.in 2020. AS 28 - Accounting Standards for Impairment of Assets Explained. [online]
Cleartax.in. Available at: https://cleartax.in/s/as-28-impairment-of-assets [Accessed 22 Jan.
2020].
Compare the Difference Between Similar Terms 2020. Difference Between Provision and
Contingent Liability | Compare the Difference Between Similar Terms. [online] Compare the
Difference Between Similar Terms. Available at:
https://www.differencebetween.com/difference-between-provision-and-vs-contingent-liability/
[Accessed 22 Jan. 2020].
Compare the Difference Between Similar Terms 2020. Difference Between Revaluation and
Impairment | Compare the Difference Between Similar Terms. [online] Compare the Difference
Between Similar Terms. Available at: https://www.differencebetween.com/difference-between-
revaluation-and-vs-impairment/ [Accessed 22 Jan. 2020].
Debitoor.com 2020. Revaluation - What is revaluation?. [online] Debitoor.com. Available at:
https://debitoor.com/dictionary/revaluation [Accessed 22 Jan. 2020].

6FINANCIAL ACCOUNTING AND REPORTING
Iasplus.com 2020. IAS 36 — Impairment of Assets. [online] Iasplus.com. Available at:
https://www.iasplus.com/en/standards/ias/ias36 [Accessed 22 Jan. 2020].
Iasplus.com 2020. IAS 37 — Provisions, Contingent Liabilities and Contingent Assets. [online]
Iasplus.com. Available at: https://www.iasplus.com/en/standards/ias/ias37 [Accessed 22 Jan.
2020].
Toppr-guides 2020. Contingent Liability: Meaning, Accounting Treatment and Examples.
[online] Toppr-guides. Available at: https://www.toppr.com/guides/principles-and-practice-of-
accounting/contingent-assets-and-liabilities/contingent-liability/ [Accessed 22 Jan. 2020].