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ACC510 Financial Statements Analysis For Contingent Assets And Contingent Liabilities

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Questions:

You have been randomly assigned an Australian publicly listed company (refer to the separate excel spreadsheet provided to identify your company).  Using the financial reports for your company, you are required to prepare an essay that addresses the 8 requirements listed below.  
 
1.Provide details of the provisions and contingencies recorded or disclosed by your company.
2.Discuss the recognition criteria and measurement issues associated with those provisions or contingencies.   
3.With reference to one specific contingency recorded or disclosed by the company, provide an argument for and against the inclusion of the contingency in the financial report.   
4.Provide details of leased items that are recorded or disclosed by your company.
5.Discuss the classification and presentation requirements relevant to leased items, and in doing so provide an explanation for how the leased items of your company have been presented on the financial statements.   
6.Identify and explain a hypothetical situation where one of the leased items may need to be reclassified.
7.Select a non-current asset from the financial statements of your company.  Provide details of this item (including identify the valuation method used for this item).
8.With reference to qualitative characteristics, provide an argument for using an alternative valuation method for this non-current asset.



 

Answer:

Introduction

The issue that is presented is that the accounting statements of Billabong  International Limited should has been asked to be analyzed in order to determine the fact whether the accounting reports are prepared in compliance to the prescribed standards for the purpose of determining the reliability of the accounting statements. The financial report of the company is analyzed to discuss the important points that are mentioned in the report. The main aim of the report is to provide a detailed understanding and analysis of the financial statement of the company.

 

Contingencies and Provisions

The contingencies are disclosed in the accounting statements of the corporate entities have been segregated into a number of financial components. The term contingency refers to the assets and the liabilities that are not accounted for and have occurred on an emergency basis. The first component included in the financial report under the head of Contingencies is Guarantees. The financial guarantee contract is realized as a liability that is in the nature of finance at the time of issuing the guarantee. This particular liability is measured at fair value method in accordance to the standards set by the Australian Accounting Standards Board. The particular accounting standard that is utilized is the AASB 137 Provisions, Contingent Assets and Contingent Liabilities (Belal 2016).

The financial component that is considered is the Letters of Credit. Enough financial disclosures are provided in regards to the same. The Group had $2.4 million letters of credit. The letters of credit are not limited to the leases and insurances (Belal 2016).

Next, the financial component that is disclosed in the accounting statements as shown in the below figure for the financial year of 2017 is the contingent liability that is associated with the terminated agreement. It is further mentioned in the annual report that the Group has incurred the contingent liability of up to $3.5 million.

The provisions that are included in the accounting statements of the company included in the financial report for the financial year of 2017 and of the amount of $14,160.

Recognition Criteria and Measurement associated with provision or contingent liability

The recognition criteria and the measurement issues that are associated with the provisions and the contingencies are as follows:

  • Guarantees – The recognition criteria that is included in the accounting statements in regards to the particular liability of guarantees is that the measurement has been carried out using the fair value technique that is mentioned in the AASB 137. Letters of Credit – the letters of credit is recognized in regards to the undrawn letters and is not limited to leases and insurances.
  • No information are disclosed in regards to the recognition of the contingent liabilities (Dumayet al. 2016,)

Provisions are measured based on the best estimate of the management that will be required to settle the current obligations at the balance sheet date.  The rate of discount that will be used in determining the present value of is the pre tax rate that reflects the current assessment of the market situation relating to the current time value of money and the associated risks. The interest expenses should be recognized for the increase in the passage of time. 

 

Contingency recorded

The contingency recorder that is included in the financial report can be referred to in case of guarantees. It has been stated in the accounting report of the corporate entity that the financial guarantee contracts have been realized as a part of the liability that has been incurred when the guarantee has been issued. The liability has been measured at a fair value. The contingency recorder will not be used for the purpose of other contingent liabilities due to the fact that the guarantees might fluctuate resulting the improper reflection of the treatment of the accounting components. (Dumay et al. 2016). This will affect the qualitative features of the accounting statements. This means that the essential qualitative features like the aspect of reliability, understandability and comparability of the financial statements will be affected. Next, the aspect of understandability refers to the extent up to which the financial statements can be understood and interpreted by the investors of the company. Lastly, the aspect of the comparability mention the fact whether the accounting statements that have been prepared are according to the comparability standards that have been established by the accounting bodies (Macve 2015).

Plant and Equipment under financial leases

The picture below depicts that the plant and equipment under financial leases which are entered in the accounting report of Billabong International Limited display an amount of $1189 in the accounting year of 2017 and $1253 in the accounting year of 2016. It has been further mentioned in the balance sheet of the company that the rental expense in relation to operating leases have been divided into the categories of minimum lease payments, contingent rentals and sub-leases. The amounts have been disclosed as $86,877 and $80,923. The sub leases have been revealed as 62 and 79 in the financial report of the company. The lease liabilities that have been incurred by the corporate entity $1247 in the financial year of 2017 and $1675 in the financial year of 2016. The accounting body of Australian Accounting Standards Board has led to the establishment of the accounting standard of AASB 16 (Grant 2016).

 

Treatment of leases

The particular accounting standard that should be utilized for the purpose of treating the leases that have been included in the accounting statements of the corporate entity is AASB 16 that has been established by the Australian Accounting Standards Board. Moreover, the recognition of the interest has been carried out over the leasing terms. The exceptions that have been included in the financial report are the short-term and low-value leases(Grant 2016).

The plant and equipment under financial leases which are entered in the accounting report of Billabong International Limited display an amount of $1189 in the financial year of 2017 and $1253 in the financial year of 2016. The lease liabilities that have been incurred by the corporate entity $1247 in the financial year of 2017 and $1675 in the financial year of 2016.

Reclassification of the leased item

The issue that has been presented in the question is that a hypothetical situation has been asked to be described in which a leased item might be needed to be reclassified. This can be helped with a number of potential examples that can be listed down as follows:

  • The leaser results in the transferring of the ownership of the asset to the lease by the leasing term end.
  • The lease experiences the option to make the purchase of the asset at an expected price that is lower than the fair value
  • The nature of the leased assets enable the lease to utilize them without incorporating any major modifications (Macve 2015)

Non-current asset – impairment method

The issue that has been presented in the question refers to the fact that a particular asset that has been included in the financial statements of the companies has been asked to be identified and the required details have been asked to be specified. The particular asset that has been chosen is the receivables that has been included in the accounting statements of the corporate entity and reveals an account balance of $7351 in the current financial year of 2017. The receivables account indicates the amount that is pending or the amount that can be received from the debtors of the company. Moreover, the receivables also account for the portion of sales that have been carried out on credit. Furthermore, the disclosure that has been provided in the annual report of the corporate entity revolves around the fact that the segregation of the receivables has been done on the basis of prepayments, other receivables and prepaid costs of borrowing for the facilities that have not been drawn (Macve 2015).

The information pertaining to the valuation of the receivables that have been provided in the annual financial report of the corporate entity is that the non-current receivables are not impaired.

 

Valuation Method for Non Current Assets

An alternative method for the valuation of the receivables would be the fair value consideration or the historical cost valuation (Zeff 2016, p 10). These two valuation methods would certainly result in the increase in the valuation of the particular account which would in turn result in a negative impact. Moreover the fair value technique is preferred over the historical cost technique. This is due to the fact that the fair value technique is recommended by the accounting board. (Lang and Stice-Lawrence 2015), p. 13.

Conclusion

The report provides a detailed analysis of the above points mentioned. The detailed analysis of various points relating to the company is covered and based on this a conclusion is formed. The particular conclusion that can be arrived at refers to the fact that the corporate entity has more or less adhered to the accounting regulations for the preparation of the financial statements. This means that the preparation of the financial statements has been carried out with much diligence and care. Moreover, the accounting statements that are prepared by the corporate entity of Billabong International Limited also reflect the fact that enough disclosures will be needed in order to improve and enhance the particular task of financial reporting by the corporate entity.

 

References

Belal, A.R., 2016. Corporate social responsibility reporting in developing countries: The case of Bangladesh. Routledge.

Dumay, J., Bernardi, C., Guthrie, J. and Demartini, P., 2016, September. Integrated reporting: a structured literature review. In Accounting Forum (Vol. 40, No. 3, pp. 166-185). Elsevier.

Gigler, F., Kanodia, C., Sapra, H. and Venugopalan, R., 2014. How frequent financial reporting can cause managerial short?termism: An analysis of the costs and benefits of increasing reporting frequency. Journal of Accounting Research, 52(2), pp.357-387.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Lang, M. and Stice-Lawrence, L., 2015. Textual analysis and international financial reporting: Large sample evidence. Journal of Accounting and Economics, 60(2-3), pp.110-135.

Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?.Routledge.

Robert Knechel, W., Vanstraelen, A. and Zerni, M., 2015. Does the identity of engagement partners matter? An analysis of audit partner reporting decisions. Contemporary Accounting Research, 32(4), pp.1443-1478.

Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

Zeff, S.A., 2016. Forging accounting principles in five countries: A history and an analysis of trends. Routledge.

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