Recognition of contingencies and contingent liabilities

Discuss About The International Classification Of Financial Reporting.

The discourse of the essay has stated about evaluation of financial statements for EVZ Ltd for determining whether the accounting principles adopted by the company are in compliance with the stated standards. This has been able to ascertain the overall reliability in the report. In addition to this, the main facts from the annual report are established with an in-depth understanding and determination of appropriate facts as for the evaluation of financial statements.

The contingent liabilities of the company are recognised as per the fair value for ensuring the most reliable measurement. In addition to this, any obligation associated to contingent consideration is classified under either equity instrument or financial liability based on the nature of arrangement. In addition to this, the right to refund have been previously discerned to be recognised as receivable in nature subsequently, the initial assessment of contingent consideration which are categorised as equity is not really measured and settled within the equity of the company. Moreover, the contingent consideration is classified as liability or asset which are re-measured the end of each financial year to fair value “statement of comprehensive income or profit and loss” unless the change in values are considered it existing date of acquisition (Evz.com.au 2018).

The provisions associated to contingencies have been stated with property leases which have contingent went on provision within the legal agreement and are required to be considered for minimum lease payment. “Apart from drawn bank guarantee facilities” the company did not have any “contingent liabilities as at 30 June 2017” (Barth 2018).

All the important conditions associated to recognition and measurement of issues have been considered with the provision for contingencies as stated below:

The main standard for recognition of guarantees in the annual report with specific reference to the liability of guarantees has been conducted with of “fair value method” as described under AASB 137.

The company has made several key assumptions for including the value in use calculation with gross margin and additional allowances for any potential capital expenditure along with normalisation of working capital changes. Under the various types of short-term borrowings, the annual limit on the capital expenditure has amounted to $ 1000000 without any prior bank approval. The capital expenditure commitments of the company under the segment asset increase for the period is seen with $ 159042 for engineering, $ 82301 for energy and $ 125819 for water consumption. The total capital expenditure commitment as at 30 June 2017 is seen as $ 367162 (Dumay 2016).

Lease commitments and treatment of leases

Except for the “drawn bank guarantee facilities” the company did not have any “contingent liabilities as at 30 June 2017”.

The consideration of provision by the company is done at the time of incorporating the financial assets and financial liabilities during the time when an entity becomes a party to the contractual provision of instrument. The date of trading is adopted for the financial assets which are delivered within the timeframe is established by the convention followed in the marketplace.

Based on the discussion of contingencies stated in the annual report of EVZ Ltd is seen to be dealing with contingencies only in terms of bank guarantees. These guarantees are considered as a portion of liability and are incurred at the time of issuance. In addition to this, the measurement is done at fair value basis. The recording of these contingencies would not be applied in case of other liabilities as the bank guarantee can vary thereby leading to inappropriate assessment of treating accounting elements (Nobes 2014). This will have a direct role on the qualitative characteristics of the financial reporting is. In addition to this, the qualitative characteristics like compatibility, understandability and reliability will be also compromised. The main aspect for understandability have denoted the level to which the investors and organisation are able to understand and evaluate the financial statements. Lastly, the comparability indicators of financial assessments are based on the standards which have been set by the accounting authorities (Gigler et al. 2014).

The leases of the “fixed assets in which there is substantial incidental benefits to the ownership of the asset but not legal ownership is transferred to the entities in economic entity” which are known as financial leases. Moreover, the financial leases are capitalised by recording of assets and liabilities at a lower value equal to the fair value of his property are present value of the minimum lease payments (Warren 2016). These are further included with any guaranteed residual values. It is also depicted that the lease payments are allotted in terms of these interest expense for the period and the liability. The leased assets of the company are depreciated based on “straight-line basis over their estimated useful lives”. Lastly, the lease incentives are considered as a part of liability and amortisation is done on a straight-line basis over the lease term (Robb, Rohde and Green 2016).

The total lease commitments of the company are depicted as $ 118,616 in 2017 and $ 240,747 in 2016.

Recognition of guarantees

The standards which are yet to be adopted seen with AASB 16 treatment of leases associated to the accounting statements which are related to leases prepared with the aforementioned standard. Under the operating lease commitments, the property is not later than 12 months that depicted with leases amounting to $ 566,680 in 2017 and $ 490,809 in 2016. In addition to this, between 12 months and five years the property lease commitment was depicted as $ 984,686 in 2017 and $ 737,214 in 2016. The total property lease commitment was 1,551,366 in 2017 and $ 1,228,023 in 2016. In addition to this, the plant and equipment leases not later than 12 months were seen as 284,362 in 2017 and 263,214 in 2016. Moreover, the leases between one year and five years for plant and equipment was observed to be 549,789 in 2017 and $ 578,676 in 2016 (James 2016).

The important consideration of the hypothetical scenario has been developed with reclassification of the lease items. This is defined with an aforementioned list of examples stated as follows:

• The asset ownership is transferred to the lessee at the end of leased tenure
• The lessee is seen to provide it with the option for buying the leased asset at a price below its fair value
• The use of leased asset, can be made by the lessee as there is no modification needed (Boyle, Carpenter and Mahoney 2014)

The various types of non-current assets are valued with items such as “trade and other receivables, plant and equipment, deferred tax assets and intangible assets”. The total trade and other receivables fear observed as $ 1,119,934 in 2017 and $ 1,449,202 thousand in 2016. The trade and other receivables are sending classified as financial assets as per. The present trade receivables are considered with non-interest-bearing receivables within period of 30 days. In addition to this, plant and equipment amounted to $ 3,777,140 in 2017. In addition to this, the deferred tax asset was valued at $ 2,668,652 and intangible assets was considered to be same in both 2017 and 2016 with the value of $ 12,072,010. The total amount of non-current assets in 2017 was depicted to be $ 19,637,736 and in 2016 it was observed as $ 22,523,449 (Pearson 2018). 

the alternative method of valuation of intangible assets may be considered with the income approach. This will be best suited for generating income when it enables the assets in terms of generating the cash flows. This is conducive in receiving future benefits and converting the discounted amount which is seen as the outcome of increased turnover or cost savings. Therefore, there are two choices in case EVZ Ltd decides to comply to this approach for valuing the intangibles (Wong and Joshi 2015). The first option can be considered with capitalising the single for the advantages or discounting of future low of benefits. This particular consideration will be able to investigate the rate of discount by either using “weighted average cost of capital”, “weighted average return on assets” or “internal rate of return”.  In spite of this, as this technique is not considered to be better in terms of “historical cost approach or fair value technique”, AASB does not prescribe the companies to comply to this method (Shea 2017).

Conclusion:

The main discourse of the study has been able to provide a lucid understanding of the financial statement published by EVZ Ltd in 2017. The company has further about to considered the effective standards which are listed as per AASB for recognition of the various types of items under the financial reporting. This has further implied with the financial statement which are developed with due diligence and care. In addition to this, the accounting statements in the organisation have focused on adequate disclosures which might be useful in improving the overall quality of financial statements for EVZ Ltd.

References

Barth, M.E., 2018. The Future of Financial Reporting: Insights from Research. Abacus, 54(1), pp.66-78.

Boyle, D.M., Carpenter, B.W. and Mahoney, D.P., 2014. Lease Accounting: Lessee Provisions of the Proposed Accounting Standards Update. Management Accounting Quarterly, 15(2).

Dumay, J., 2016. A critical reflection on the future of intellectual capital: from reporting to disclosure. Journal of Intellectual capital, 17(1), pp.168-184.

Evz.com.au. (2018). [online] Available at: https://evz.com.au/images/downloads/Annual_Report_to_Shareholders_2017.pdf [Accessed 20 May 2018].

Gigler, F., Kanodia, C., Sapra, H. and Venugopalan, R., 2014. How frequent financial reporting can cause managerial short?termism: An analysis of the costs and benefits of increasing reporting frequency. Journal of Accounting Research, 52(2), pp.357-387.

James, M.L., 2016. Accounting for Leases: A Case Exploring the Effect of the New Lease Accounting Standard on the Financial Statements. Journal of the International Academy for Case Studies, 22(3), p.152.

Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.

Pearson, J.L., 2018. A Collection of Accounting Case Studies Analyzing Financial Reporting (Doctoral dissertation, The University of Mississippi).

Robb, D.A., Rohde, F.H. and Green, P.F., 2016. Standard Business Reporting in Australia: efficiency, effectiveness, or both?. Accounting & Finance, 56(2), pp.509-544.

Shea, R., 2017. Homeless Veterans: VA Should Improve Reporting on the Benefits Provided by Leases of Unneeded Property.

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

Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), p.27.