Accounting Issue Involved and Solutions
Every company has its own system of accounting for the transactions in the books of accounts and that too shall be done in accordance with the relevant accounting standard and the other provisions of the Corporations Act 2001 and other similar statutes. But before discussing the compliance with the requirements, it is necessary to have the accounting and similar issues identified within the organization and then the treatment of the same shall be checked with reference to the relevant laws of that particular country. In the given case of Pewter Limited, there are major accounting issues involved in the treatment of various items and the same accounting issues have been explained below:
- In the given case, it has been resolved that the company – Pewter Limited has given the guarantee for any damage which is caused to the ship Steve Irwin. The accounting issue is that whether the guarantee given shall be classified as the contingent liability representing off the balance sheet or the guarantee shall be classified as the actual liability.
- Second issue is that when the uncertain event for say ship has been badly damaged due to Japanese whalers has occurred then the amount so incurred shall be accounted for in the books of accounts as expense or it shall be shown as the liability
- The third issue is that whether the guarantee amount so disclosed will be reflected in the Profit and loss account or the statement of the balance sheet.
- The fourth issue of accounting is that whether the repair costs so determined shall be capitalize to the name of brand or else shall be charged to the statement of the profit and loss account.
- The last and major accounting issue involves is that whether the company’s position of the net worth will increase or work down.
The above issues have been identified from the statement made by you. The answer to all the accounting issues involved has been mentioned in the below list.
- At first, the accounting treatment and the disclosure shall be detailed as to how the guarantee shall be classified as the Contingent Liability. In accordance with the provisions of the paragraph 10 of Australian Accounting Standard 137 on Provisions, Contingent liabilities and Contingent Assets, contingent liability is defined as
- the possible obligation that has been arisen for the events occurred in the past and the existence of whom will be confirmed only when the event related to the guarantee is confirmed and
- also includes the obligation which is present and has been occurred from the events that has occurred in the past shall not be recognized as the contingent liability if it is much probable that no economic benefits will be received in future and the liability cannot be measured reliably.
In accordance with above terms and definitions mentioned, the amount of guarantee given shall be recognized as contingent liability in the notes to accounts of the company embedded in the financial statement of the company.
- The second treatment is when the guarantee is invoked which means when the event happen if the damage is happened to the ship – Steve Irwin then the contingent liability so maintained shall be transferred as the confirmed liability and will regarded as the provision in the financial statement of the company. The provision is created only because of the following reason:
- As per the paragraph 14 of the AASB 137, provision shall be recognized in the books of accounts of the company only if the company at present has the obligation which is further because of events occurred in the past and it is sure that there will be the outflow of resources which will be the need for settling the present obligation and the amount to be paid can be measured reliably.
- The third accounting issue deals with the disclosure of the contingent liability in the financial statements of the company. It shall be either disclosed in the statement of the profit or loss or in the balance sheet or somewhere else. As per paragraph 86 of the Accounting Standard 137, contingent liability is required to be disclosed off the balance sheet in the notes to accounts with the following details (AASB, 2011):
- Nature of the contingent liability shall be disclosed. It means the company is required to mention the guarantee and its nature as to why it is being created in favor of the ship.
- A reliable estimate of the amount that is involved in the guarantee amount for the reporting period
- An indication that some kind of uncertainty can happen and the amount involved in that event.
- If the company has any type of counter guarantee as a way of having the reimbursement then the same also be disclosed.
- Currently the company is having the two brand names – Arctic fresh and tropical taste. In the given case the company has the reputation regarding the compliance with rules and regulations of the environmental laws and encouraging the protection of the animals as well as the environment. Therefore, these brand names are the value creation asset for the company. Only because of these two brands along with the acknowledgement of the environmental responsibilities the company has been able to create its name in the market. The fourth major issue in accounting is that in case any repair costs is incurred in relation to Steve Irwin then whether the cost so incurred can be capitalized (Reilly, 2015). The answer to this question is yes.
- In accordance with the provisions of the Australian Accounting Standard number 138 on Intangible assets, it has been mentioned that brand is an intangible assets and its recognition and measurement shall be according to the paragraph number of this standard only (AASB, 2012).
- As per the said standard, any type of expenditure which is incurred for the marketing of the product or for the enhancement of the brands, the value shall be arrived by adding the marketing and other related cost to the carrying amount of the brand.
- It has been added because of the major reason that the company has entered into the contract of guarantee whereby the company has agreed to pay the amount of repair only to maintain their image and reputation and accordingly the said amount so paid will be treated as the capital expenditure as incurred for increasing the valuation of brand and accordingly the same shall be added to the carrying amount of the brands (Smith, 2010).
- Something which increases the value of the intangibles shall be capitalized as done in case of the brands.
- It is to be mentioned that the self constructed intangible assets are not recognized in the books of accounts and therefore shall not be considered for the purpose of making the decision (Lev, 2013).
- The last issue in accounting deals with the information as to whether the net worth of the company will be increased or not with the valuation of the brand name. With reference to the previous question, once the value of the intangibles are created as with high value then there will be the high chances of having the higher net worth. It is because net worth is equal to the Total assets less liabilities and total assets include all the assets. The increase in net worth will further will help in attracting more and more funds from the investors.
AASB, (2011), “Provisions, Contingent Liabilities and Contingent Assets” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf accessed on 04-05-2018
AASB (2012), “Intangible Assets” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf accessed on 04-05-2018.
Lev, B., (2013), “Remarks on the measurement, valuation, and reporting of intangible assets”
Reilly, R.F., (2015), “Valuing intangible assets” McGraw Hill Professional.
Smith, G.V., (2010), “Valuation of intellectual property and intangible assets” (Vol. 13). Wiley.