Evaluation of Contingencies, Provisions, and Leases

Discuss About The International Classification Of Financial Reporting.

The current essay deals with the issue by evaluating the financial statements of GWA Group Limited for ascertaining whether the accounting reports are developed in accordance with the stated standards in order to ascertain their overall reliability. The annual report of the organisation is evaluated for highlight the significant aspects mentioned in the paper. The essay intends to provide an in-depth understanding and evaluation of the financial statements of the organisation.

The contingencies reported in the financial statements of the business organisations are sub-divided into various financial elements. According to Amiram et al. (2018), contingencies denote those assets and liabilities, which are not accounted, since they have taken place due to emergency situation. The primary component that could be identified under contingency section in the annual report of the organisation is guarantees. The contract of financial guarantee is recognised in the form of liability, which is in the nature of finance when the guarantee is issued. This liability is gauged at the fair value approach in compliance with the standards of “Australian Accounting Standards Board (AASB)”. More specifically, the standard used is “AASB 137 Provisions, Contingent Assets and Contingent Liabilities”.

The financial element taken into accounting includes the capital expenditure commitments. Capital expenditure commitments are those, in which the parent entity is required to enter into contractual agreements for the wholly-owned subsidiaries in relation to acquisition of property, plant and equipment. GWA Group Limited has disclosed no such commitments based on its 2017 annual report.

The final financial element disclosed in the annual report is contingent liability, which is related to the terminated agreement. As of 2017, the organisation has not realised any contingent liability.

In case of provisions, the main items that are realised include warranties, restructuring, site restoration and other and the total amount of provisions in 2017 have been reported as $12,861,000.

The criteria of recognition and issues of measurement for provisions and contingencies are described as follows:

The criterion of recognition included in the annual report in relation to the specific liability of guarantees is that the measurement is conducted by using the technique of fair value mentioned in AASB 137.

GWA Group Limited realises its capital expenditure commitments in accordance with ‘AASB 101 Presentation of Financial Statements”, in which specific timeframes are mentioned.

The organisation has not disclosed any information regarding contingent liabilities in its annual report of 2017.

Recognition Criteria and Measurement Standards

Provisions are realised at the time the organisation has current legal or constructive obligations due to previous events that could be projected reliably and it is likely that the economic benefit outflow would be needed in settling the obligation.

The contingency that has been selected from the annual report of GWA Group Limited in 2017 is guarantees. It has been identified that the guarantees are recognised as portion of liability, which has been incurred at the time of issuing the guarantee. The measurement is made at fair value. The recorded contingency would not be used in case of other contingent liabilities, as the guarantees could vary leading to inappropriate depiction of the treatment of accounting elements (Gigler et al. 2014). This would have direct impact on the qualitative characteristics of the financial statements. This implies that the necessary qualitative characteristics such as the aspects related to understandability, reliability and comparability of such statements would be influenced. The understandability aspect denotes the degree to which the investors of the organisation could understand and evaluate its financial statements. Finally, the comparability aspect highlights whether the financial statements developed are in line with the comparability standard formulated on the part of the accounting authorities (Dumay 2016).

Property, plant and equipment under financial leases are disclosed in the annual report of GWA Group Limited having amount of $10,493,000 in 2017 in contrast to $11,281,000 in 2016. In addition, it could be identified from the annual report of the organisation that the rental expenses with regards to operating leases have been segregated into three different timeframes, which include below one year, between one year and five years and above five years. The rental expenses have been reported as $72,129,000 in 2017 compared to $33,366,000 in 2016. The lease liabilities that the organisation has realised in 2017 are observed as $15,276,000, which were $16,189,000 in 2016 (Gwagroup.com.au 2018). For recognising leases in the annual report of the organisation, GWA Group Limited has disclosed its lease payments in accordance with “AASB 16 Leases”.

The specific standard of accounting that could be used for the treatment of leases is AASB 16 and the accounting statements related to leases are prepared in accordance with the stated standard (Scott 2015). Along with this, the interest has been realised based on the terms of the lease. The exceptions that are incorporated in the annual report constitute of lower value and short-term leases (Higgins, Milne and Van Gramberg 2015).

Valuation of Intangible Assets and Alternative Approaches

Property, plant and equipment recorded under financial leases in the annual report of GWA Group Limited are valued at $10,493,000 in 2017, which were $11,281,000 in 2016. The lease liabilities that have been incurred in 2017 are $15,276,000, which were $16,189,000 in 2016.

In this case, a hypothetical situation has been developed where a particular lease item is required to be reclassified. This could be described with a list of certain examples that are represented as follows:

• The ownership of the asset is transferred to the lessee after the end of the lease term.
• An option is provided to the lessee, in which the leased asset could be bought at a price below its fair value (Jin, Shan and Taylor 2015).
• With the help of the features of the leased asset, the lessee could use it, as there is no need to make any further modifications.

In this case, a particular item listed in the non-current asset section of the balance sheet statement of GWA Group Limited is selected and accordingly, necessary details are provided about that item. Therefore, the item that is selected is intangible assets, which are included in the financial statements of the organisation and notes are provided regarding their treatment or valuation. From the balance sheet statement of the organisation, it has been found that the total value of intangible assets has been $314,242,000 in 2017 against $314,894,000 in 2016. In this context, Lang and Stice-Lawrence (2015) stated that intangible assets do not have physical value like equipment or machinery; however, they are extremely valuable for an organisation in terms of its long-term success or failure. For instance, a business organisation could develop a mailing list of the clients or it might develop a patent.

For GWA Group Limited, the intangible assets that are acquired separately are gauged on initial recognition at cost. In fact, they are valued at cost minus accumulated amortisation and accumulated impairment losses (Barth 2018). On the other hand, the intangible assets that are acquired during business combination are gauged at fair values as in the acquired date. Goodwill acquired during business combination is gauged initially at cost. The consequent expenditure related to capitalised intangible assets is capitalised at the time the future economic benefits are increased embodied in the specific assets related to each other (Naranjo, Saavedra and Verdi 2017). The other expenditures are expensed as incurred.

An alternative method of valuing intangible assets might be the income approach. This approach is best fitted at the time the intangible assets produce income or when it enables the asset in generating cash flows (Nobes 2014). With the help of this particular technique, the future benefits could be converted to one discounted amount, which is the outcome of increased turnover or cost savings. Hence, there are two choices available, if GWA Group Limited plans to adopt this approach for valuing its intangible assets. The first option is to capitalise a single group of benefits or discounting future flow of benefits. This approach investigates a rate of discount from either “weighted average cost of capital”, “weighted average return on assets” or “internal rate of return”. However, since this technique is not considered superior over the historical cost approach or fair value technique, since AASB does not prescribe the business organisations to follow this approach (Robb, Rohde and Green 2016).

Conclusion:

The essay provides an in-depth overview of the various items stated in the annual report of GWA Group Limited in 2017. It has been assessed that the organisation has conformed effectively to the standards laid down in AASB for recognising various items in its financial report. This implies that the financial statements are developed with due care and diligence. Along with this, the accounting statements of the organisation highlight the fact that adequate disclosures might be required for improving the overall quality of financial reporting of GWA Group Limited.

References:

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