Financial Accounting And Reporting Assets Assessment Answer

Answer:

668 George Street,

Melbourne, VIC 3000

Telephone 28 8 3215 5000


www.mckenzieandassociate.com.au

 

12 May 2018

Mr. Con Pewter

The managing Director

Pewter Ltd.

Level 6, 510 King William Street,

Brisbane QLD 4000

Dear Mr Pewter

Thank you for your response through e-mail. I am working as an accountant with McKenzie and Associates. Manager of the company Ms Maria McKenzie has asked me to reply your email through a letter. As per my understanding the issues mentioned by you are related to –

  • Intangible assets
  • Provisions and contingent liabilities

As the company always provided their clients with various suggestions for making decisions as per the compliance of IFRS, AASB and the Corporation Act 2001, we would like to assure you that we will provide you with the best possible recommendation for accounting treatment of the issues raised by you.

In case of any query, questions or doubts regarding the accounting treatment mentioned above, feel free to contact me through our official mail address or contact number.

Yours sincerely

Ms Emily Edwin

Accountant

McKenzie and Associates

Copy   Elle Jordan

Enc: Responses to issues

Cc: Maria McKenzie

 

Intangible assets

The issue mentioned by you regarding the strengthening the environment and record it in the financial statement of the company is related to AASB 138 on Intangible assets (Aasb.gov.au, 2018). An intangible asset is the non-physical assets that have the useful life of more than one year. Goodwill of the business is the intangible asset that is owned and associated with company’s operation. Goodwill enhances the value of the company through increasing its brand value, customer base, location, products, reputation and workforce that may have proven track record of creating income for the company. One of the main factors considered as the goodwill of the company is enhancement of the future economic benefits (Beams,  Brozovsky & Shoulders, 2017). As per the details provided by you the action of the company regarding the efforts of Steve Irwin will strengthen the environmental responsibility image through providing the guarantee of repairing the damage, if any. Therefore, it can be expected that this action will attract more customers in the long run period and will ensure the company’s long term sustainability (AASB 138 - Intangible Assets, 2015). However, in some instances though the expenditure is spend for generating the future economic benefit, it does not meet the recognition criteria required to be recognizes as an intangible asset. These kinds of expenses are known as internally generated goodwill. The internally generated goodwill is not identified as the asset as it is not recognizable source that is it cannot be segregated. Further, it does not arise from the legal rights or contractual obligation that is controlled by company and its cost cannot be measured reliably.  The main issues in recognizing the internally generated goodwill as the intangible assets is identification of when and whether the recognizable asset will generate the economic benefits and recognition of the asset at reliable cost (AASB 138 - Intangible Assets, 2015). Further, in some instances cost required for enhancing or maintaining the internally generated goodwill cannot be segregated from the cost required for daily operation of the business.  In the given case, as per the view of marketing manager the environmental reputation will enhance the image of the company. However, the amount of economic benefits that will be generated through this cannot be measured reliably and there is no surety of when and whether it will generate the benefit (AASB 138 - Intangible Assets, 2015). Therefore, the goodwill will be regarded as internally generated goodwill and will not be recognized in the financial statement of the company as intangible asset.

Provisions and contingent liabilities

As per AASB 137 on Provisions, contingent liabilities and contingent assets, the contingent liability is the expected obligation that may arise from the past events and the existence of the liability will be established only upon non-occurrence or occurrence of 1 or more than 1 tentative future event that is not in control of the company (AASB 137 - Provisions, Contingent Liabilities and Contingent Assets, 2015). The contingent liability is not recognized under the financial statement if the amount of obligation cannot be measured reliably. The contingent liability shall be disclosed through notes to account except where the possibility for economic resource outflow is remote (Sinclair & Keller, 2014). On the other hand, the provisions are the liability different from other liabilities like accruals or trade payables as under provisions there is uncertainty regarding the amount and timing of the payment for settlement of the obligation (Goodwin et al., 2016). The main difference of provision with contingent liability is that the possible obligation under contingent liability is yet to be authenticated regarding whether the obligation will lead to outflow of the economic resources. Here in the stated situation the guarantee provided by Pewter Limited on account of occurrence of any damage shall be disclosed as contingent liability through the notes to the financial statement as it has not yet confirmed as an obligation and therefore the outflow of economic resources are not yet confirmed. However, on confirming of the obligation if the company on account of providing guarantee it shall be recorded as provision in the financial statement if the amount and timing of payment is not confirmed (AASB 137 - Provisions, Contingent Liabilities and Contingent Assets, 2015). If the amount of the obligation and timing of payment is confirmed then it shall be recorded as an expense in the income statement and it will reduce the profit of the company.

 

Reference

AASB 137 - Provisions, Contingent Liabilities and Contingent Assets. (2015). AASB Standard. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB137_08-15.pdf

AASB 138 - Intangible Assets. (2015). Compiled AASB Standard. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf

Aasb.gov.au. (2018). [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf [Accessed 12 May 2018].

Beams, F. A., Brozovsky, J. A., & Shoulders, C. D. (2017). Advanced accounting. Pearson.

Goodwin, J., Atilgan, Y., Simsir, S.A. & Ahmed, K. (2016). Investor reaction to accounting misstatements under IFRS: Australian evidence.

Sinclair, R.N. & Keller, K.L. (2014). A case for brands as assets: Acquired and internally developed. Journal of Brand Management, 21(4), pp.286-302.

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