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Present Obligation On Part Of Company Because Of Some Past Events

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Question:

What Present Obligation on Part of Company Because Of Some Past Events?

 

Answer:

Introduction

The overall objective of this standard is to make sure that appropriate recognition of the contingent assets and liabilities is made as per the relevant details of this standard.  It provides the basis that must be applied for effective disclosure based on the nature timing and extent of the overall contingent assets and liabilities. The standard is to be applied on all the entities, in accounting for the contingent assets and liabilities, but is not applicable on onerous contracts and also those areas that are covered by other standards. This standard was issued on July 2004. And it is applied retrospectively on all the companies under this act. Every company needs to follow the same in the preparation and presentation of their financial statements.  Now there have been changes in the same, and the effective standard is applicable on the companies from January 2018. Previously it was applicable from July 2014. (actuaries.asn.au, 2017)

Part three

As per the relevant accounting standard, a provision shall be recognised if it satisfies the following condition-

  • There is a present obligation on part of the company because of some past events.
  • It is ascertained that there will be a flow of income to satisfy the obligations that will arise due to past events in the future.
  • It is possible to make a reliable estimate of the amount that will be needed.

In cases where it is not apparent that a present obligation is there, a past obligation will be considered to give rise to the present obligation, and all the relevant evidences will be taken to ascertain whether such past event gives rise to such present obligation. In most of the cases there will be evidences that proves that a past action is giving rise to a present obligation , however where the company is not sure of any such event , it will look for such evidences that proves that certain present obligation would be present at the end of the accounting period. Where is  more or less sure that a present obligation will be there at the end of the accounting period, the company will recognise such obligation.  Where the entity is not sure whether the present obligation would be there or not, the entity will recognise the same as a remote liability, where the entity is sure that there will no outflow of resources in the future in respect of the same. It is only those past actions that are caused by the entity action s, on which any present obligation will be recognised,. It is imperative that the present obligation must be due to some other party that means that there must be some flow of resources.  Sometimes an event may not give rise to a present obligation immediately but may cause the same at some later date in the future, for example in case of law suits, where change in any law or amendment may lead to rise of obligation on part of the company.  It gives rise to a constructive event. Where any law is in drafting stage, then any obligation because of the same can be considered only when it is sure that the required law will be made live.  There must be an outflow of resources for any obligation to be recognised as present obligation. Where there many cases of same type of obligation, outflow of resources in case of the same shall be determined on the basis of class of obligation.  The overall estimation is an important part of any financial statements and it does not undermine their reliability. The nature of any estimate matter more than the overall form. (Cpaaustralia.com.au, 2017)

 


Reviewing the balance sheet of an Australian company ,  Infosys Technologies (Australia) Pty Limited. After reviewing the balance sheet of the company for the current year, we find that the company has made an estimation for the contingent assets and liabilities, and shown a disclosure for the same as per the relevant accounting standard. The total amount of contingent liabilities recorded by the company were 29 core as compared to the last year 22 core. As per the latest audited balance sheet of the company “ Claims against the company not acknowledged as debts include demand from the Indian Income tax authorities for payment of tax of ` 3,337 core ( ` 1,548 core)” (infosys.com, 2017) It also included interest  of ` 964 core ( ` 430 core) were paid to statutory tax authorities which includes ` 1,788 core paid during the year ended March 31, 2015 consequent to demand from tax authorities in India for fiscal 2010 towards rejection of certain tax benefits. (infosys.com, 2017)

Conclusion

Hence we see that how important it is very company to make an estimate of the past and the present obligation and to record the contingent assets ND liabilities accordingly.  It is done so that in future when the company has to pay certain obligations because of pasta actions , the company must have the required amount of fund for the same. This standards was developed to help the auditors to provide a correct view on the financial position of the company ,a ND also to the end users of the financial report

 

References

Jade.io. (2017). Barnet Jade - Find recent Australian legal decisions, judgments, case summaries for legal professionals (Judgments And Decisions Enhanced). [online] Available at: https://jade.io/j/?a=outline&id=500086 [Accessed 23 May 2017].

infosys.com. (2017). financial statements. [online] Available at: https://www.infosys.com/investors/reports-filings/quarterly-results/2015-2016/q4/Documents/standalone/SA-FY16-Q4-Finstatement.pdf [Accessed 23 May 2017].

Cpaaustralia.com.au. (2017). Cite a Website - Cite This For Me. [online] Available at: https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/reporting/reporting-ifrsfactsheet-provisions-contingent-liabilities-and-contingent-assets.pdf?la=en [Accessed 23 May 2017].

actuaries.asn.au. (2017). Provisionforselfinsuredliabilities1. [online] Available at: https://www.actuaries.asn.au/library/standards/Provisionforselfinsuredliabilities1.pdf [Accessed 23 May 2017].

AS, A.S., 2004. Provisions, Contingent Liabilities and Contingent Assets. MEASUREMENT, 35, p.45.

AASB, A.S., 2004. Presentation of Financial Statements. Balance Sheet, 68, p.73.

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