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Assume that you are a graduate accountant working for Magenta and Associates a public accounting firm situated at 718 Geelong Street, Melbourne, VIC 3000. The manager of your firm, Ms. Lisa Magenta has asked you to draft a letter in response to an email received from a client – Mr. Christopher Sampson, the Managing Director of Beachlife Ltd, raising a number of issues regarding his company – see the copy of the email on the next page.

Part A: Technical component 15% - This mark covers the technical content of your advice and the explanation on each of the issues, the calculations and the sources used.

Part B: Communication Skills – Letter Writing 10% - This mark covers the generic skills of business letter writing; layout, clear meaning, structure and organisation, appropriate tone and grammar, spelling and punctuation etc. 

Contingent Liabilities and their Accounting

718 Geelong Street,

MELBOURNE, VIC 3000

Telephone +61 7894 679094

www.magentaandassociates.com.au

15th January 2018

Mr. Christopher Sampson

The Managing Director

Beachlife Ltd.

Level 7, 927 William Street,

Brisbane QLD 4000

Dear Christopher,

It is a great delight for us to get the feedback from you and we convey our thankful wish to you in return of your email that you have sent us. We cannot express our happiness in words when we saw that you have reached to us and we can guarantee you with the best solutions available to you so that you can be able to take decision in a better manner. As always, we will help you to take the proper decision in making the best solutions for the problems persisting in accounting in addition to the issues that you have described within the body of the previous mail. You will get help in the recommendation part that will be presented to you as per the Corporation Act 2001, AASB and the elucidation will also be in context of the accounting issues that exist in IFRS. 


I hope you are attentive of the fact that the contingent liabilities are those that have the probability of losses which can come up in the future days. The reason behind these upcoming losses are considered to be either the non- occurrence or occurrence of a particular event. On the other hand the reason can also be the outcome of a definite event or others as well. There are several instances that can be taken into consideration in these cases of contingent liabilities such as the exploration about the failure of the organization which might not be clearly completed yet and the claim comes that although it is legal in its characteristics but the warranties that exist in the each and every products are procured by the customers in the end (Macve 2015). The liabilities which are known to be contingent require to be displayed in the financial statement of accounting of the company along with the potential amount that has been already estimated by the company. It will help in tracking and keeping a proper record in the annual sheet of the company. The approximate amount of the company will be helpful in preventing the probable loss of the company that can arise in the coming days because a specific amount has been kept separately by the company alongside. That is why it is recommended that contingent liabilities should always be used for the betterment of the company.

Provision and Benefit in Accounting

As per Para 29, it can be found out that altogether the liabilities of the company are so that they have to take care of the responsibilities in such a way that it can be flashed under the broad banner of contingent liability (Pratt 2016). The prime factor here is that the company should develop these liabilities from the root because there is no possibility that it will take place later in the financial year. Henceforth, the explanation related to these liabilities has to be consistent and continuous which will control the outflow of the resources and this will also bear the advantage of strengthening the economy of the company. On the other hand it can be said that the provision or benefit that is available inside the company has to be clearly determined due to the fact of the current and legit responsibilities which might turn out from the previous events of the history. Also the assumption can be made in an appropriate way so that the proper worth of money can be kept separately for it. The primary motive behind the benefit provided to the company is that it needs to be regulated with the amount or balance of the ongoing financial year. This will help in getting the cost back that was allocated for a fixed year and the level of finances that was approximately thought of can be calculated within that specific time period (Barth 2015). 



This is the reason why the provision that is used in the company is not a direct version of saving, which might look like one in the first place. In general it can be determined that the amount comes in direct form under the balance sheet which further comes under the banner of income statement and thus it needs to be placed in the bucket of expenses. Also it can be stated that the key distinction in between the contingent liabilities and the provision is that the latter one is taken up in form of the financial statements whereas the former one which is also termed as contingent can be used under the banner of liabilities. This, in turn, is kept a record in the form of a note inside the financial statements of the company. In addition to that if there is high rate of potential liability whereas it is estimated to be around 60 percent to 90 percent then it is absolutely mandatory to be shown under the banner of provision inside the financial statements which was used for the company. But it can be contradicted by saying that if it is seen that the rate of liability has exceeded five percent but still has not reached sixty percent then it should be kept in record in the form of a note within the financial statement of the company but if the percentage still falls less than five percent then the company will not be able to decide on any kind of action about it. 

Intangible Assets in Accounting


Hence in accordance with the AASB 137 in the Provisions, Contingent Liabilities and Contingent Assets, the main issue has been explained well in the mail that has been sent (Henderson et al. 2015). We can help you by providing suggestions that the intangible assets should also exist in the current balance sheet which will be effective in carrying the requisite paying back and that is why the identity will also be created. In this particular case, it can be observed that the company has an asset of amount $800,000 which was of the time period 30th June, 2018 and it was also recognized according to the assessment formed by the directors. This helps in deriving a conclusion of this case that the particular company needs to make amendments in its policies as per the present occurrence such that accounting will be identified in terms of the cost which had taken a good shape on the basis of the company’s internal environment. In addition to that it can also be said that the intangible assets kept for the company should have a compulsory life in order to help in the purpose of paying off within the particular time period when it was used. This also needs to be kept in track and a record should be maintained in the form of a note within the financial statements. That is how the amount can be taken care of with the intention of paying off or amortization and the report has to be made keeping in mind the cost of $800,000 which can be later utilized with the remaining value of the assets of the company. 


In considering the second case it can be seen that the company Beachlife Ltd. has gone for a sales contract with the Goodsports Ltd. on 1st December 2017 with an amount of $90,000 where the payment was done on the 30th of December, 2017. Despite the fact, the equipments were delivered by the company on 10th December 2017. As per the contract of the Sales department the Goodsports Ltd. Made way for the factors that will be required to keep the expenses for the maintenance of the equipment in the first year after the procurement was already done by the company regarding the product that they manufacture. There was a fixed cost kept aside for the maintenance of the company which is $7500. On the contrary, Goodsports Ltd. was not at all glad with the service and the maintenance of the equipment that was provided to them by the company and that is the reason why they had to make a refund of an amount of fifteen percent on the total price that were paid by them which makes it a total of $90000 * 15 percent that makes it $13500. Hence, it can be said that the present scene of Beachlife Ltd. they have to display an amount of $90000 which was recorded as sales under the banner of income for the purpose of selling the equipments ad they have received the money within the year which was 30th December 2017. In addition to that the amount that was kept for maintenance that is $7500 should be placed under the banner of contingent liability within the balance sheet of the financial statement and also in the statement of income. There is a necessity to keep a record of the same similarly under the banner of provision for the approximate amount. Moreover, the amount of $13500 must be shown in the form of notes inside the financial statement of the company clearly under the banner of contingent liability as this similar kind of liability are not possible in their characteristic (Warren 2016).      


If you come across any kind of doubt about the suggestions that we have provided to you then do not hesitate to contact us in the given phone number or mail us regarding the issue at any time.

Yours sincerely

Ms. Lisa Magenta

Manager

Magenta and Associates

Copy: Emily Thompson

Enc: Letter writing handout

Reference

Barth, M.E., 2015. Financial accounting research, practice, and financial accountability. Abacus, 51(4), pp.499-510.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

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

Pratt, J., 2016. Financial accounting in an economic context. John Wiley & Sons.       

Warren, C.M., 2016. The impact of International Accounting Standards Board (IASB)/International Financial Reporting Standard 16 (IFRS 16). Property Management, 34(3).           

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