Contingencies and Provisions for Billabong

Discuss About The Methods Measuring Impairment Of Accounts.

Billabong is one of the world’s most famous surfing companies, which also indulges in making and creating several clothing accessories. Along with this, the company operates in the section of producing bag packs, clothing apparels and other kinds of wet suit and surfing accessories. In this essay various kinds of contingencies, provisions and lease properties in association with the clothing company Billabong has been discussed.

 Like any other company, Billabong, too has a certain number of contingencies and other kinds of provisions, which have been discussed over here. The main contingencies of the company are divided into various parts and all of them have been mentioned below. Contingencies refer to those kinds of situation which might occur and whose occurrence depends on the happening of a certain event.  The main kinds of contingencies are guarantees, letters of credit, supply chain finance facilities, contingent liability associated with terminated agreement, RVCA compensation and the scheme implementation deed with Board riders (Heaney and Holmén., 2004). All these come under the purview of contingent liabilities for the company. In association with this, the company has also accounted for at least $14,160 million as a part of its annual provisions. A thorough mention of the different contingent liabilities for the surfing company has been provided below:

There are certain recognition criteria’s which are a fundamental part of any contingency or provisions recognition in the financial statements of any company. The criteria’s for measuring the contingency and provisions are as follows:

• Recognition of guarantees: The recognition criterion that is incorporated in the accounting statements with regards to the particular liability of guarantees is that the measurement of these guarantees, including all the guarantees relating to the parent companies, have been carried out using the fair value technique which is comprehensively stated in the provisions of the AASB 137.
• Letters of Credit – In case of the letters of credit, the recognition is done on the basis of the undrawn letters and is not restricted to just leases and insurances. They are treated and measured by taking into account the rules of measurement as has been mentioned in IAS 39, where the recognition and measurements are done.
• Provisions measurement: In the case of measurement of provisions, the measurement is done on the basis of the present value as per the management’s best estimate. The discount rate which is used to measure the present value is actually a pre-tax rate, which reflects the present market assessments about the time value of money and specific risk related liabilities.

In this context, letters of credit has been chosen as the contingency and the various points in the context of for and against for this inclusion has been provided over here. It is a highly customisable instrument of trade and it helps in creating new trade relationships by reducing credit risk, but it is a costly instrument, by adding to the cost of business in the form of fees and formalities.

It is a customisable instrument trading and the parties initiating and participating it can alter and change the terms and conditions, as per their wishes and desires. It is also a relatively safer credit instrument for the companies and the different parties, as the credit worthiness of the company or the concerned party is transferred to the issuing bank (Christensen and Nikolayev. 2013). On the other hand, has some demerits too. It increases the cost of doing business, the banks charge a hefty fee for providing the service, which might escalate, if the parties involved are ready to add some more features into the agreement. Moreover, there exists a complex set of governing rules, which can be hugely misused to take any and every kind of advantage of the Applicant Company or entity.

Measuring Contingencies for the Company

In the given essay, plant and equipment which have come under the purview of financial leases are some of the most prominent parts of lease of the company. When careful analysis and observance of the leases are done, it could be seen that the plant and equipment lease of the company for the year 2017 was estimated valued at $1189 million and for the year 2016, it was valued at $1253 (Billabong, 2018).  When further analysis id done, it could be seen that it has been categorically stated in the balance sheet of the company segregation of the rental expense under the genre of operating leases. They have been reclassified into contingent rentals, sub leases and minimum lease payments. The minimum lease payments for the years 2017 and 2016 are $86,877 and $80,923 respectively.  In the case of the sub leases of Billabong, the percentages are 62% and 79% for the year 2017 and 2016 respectively. (Grant 2016).

The treatment of the various kinds of financial and operating leases are an integral part of any company’s overall financial success. In this regard, there are a certain number of rules or provisions which oversee the different kinds of leases and their treatments. In this regard, AASB 16 is responsible for guiding and overseeing the treatment of the different kinds of leases. It has been carefully crafted under the able stewardship of the Australian Accounting Standards Board (Weil., Schipper and Francis., 2013). Nevertheless, the identification of the interest has reportedly implemented during the course of the leasing period. There are many exemptions that have been incorporated in the financial report such as the ones specially, short as well as various low worth leases.  (Grant 2016). The balance sheet which contains all the important information of the company are as follows:

The importance of a hypothetical analysis is very important for ensuring a robust understanding of the different kinds of lease items. Here in this regard, one of the non-current assets of the company needs to be identified and consequently, with the help of a hypothetical situation, explanation of the reclassification is to be done. The reason for identifying letters of credit out of the remaining ones, is the massive advantage which is provided by it. It is a safe and trustworthy trading instrument (Asic.gov.au. 2018). In this case a hypothetical situation, the reclassification of letters of credit has been explained.  It is currently valued at $3 million. Suppose, if the company wants some financial funds due to some kind of contingency, then in such a case, the company needs to approach the banks in need of money. The bank would take into account the financial strength and credit worthiness of the company. Only after initial screening and only when the bank is convinced of the financial strength of the company, will they be issued the amount of money (Terry-Armstrong., 2014). The company has to choose in which way the letter of credit would be issued, after which it would be initiated. If the company sells a certain product to its customers or clients for example for a price money of $4000 to any client such as client A. In this case, if the company draws a letter of credit upon the Mr A, for a period of 90 days. In this case, if the client had already assured the company of his ability to pay the full amount before the competition of its time duration of 90 days. Then the company is required to provide him a discount. This discount would become a liability for the company, only and only when the client pays the money before the expiry of the allotted time frame. Thus, this would become a liability only on the happening of a certain event. In this case, the need of reclassification of the non-current asset becomes important.

Financial and Operating Leases of Billabong

Plant and machinery has been chosen as the non-current asset for this purpose. The company is on the verge of closure as a result of which the company could only receive $0.2 million and $ 6.4 for the year 2017 and 2016 respectively. One of the most important aspect of any non-current asset is the valuation method which is used for valuation purposes. One of the most important method of valuation is the Depreciation Replacement Cost (DRC). The method is used by estimating its age, economic life and residual value in order to estimate the current value.

A different alternative method for the valuation of the plant and machinery would be the famous comparison method. In this method, the most important aspect is the measurement of the historical cost of the plant and machinery. In this method, the historical cost of the concerned leased asset is regularly compared with the current market price as per the market price. It is internationally advised by the accounting boards all around the world (Asic.gov.au. 2018).

Conclusion:

Through this essay a bird’ eye view has been provided over the different kinds of contingencies, provisions and the different lease associated with the clothing company has been provided. The different kind of contingent assets and liabilities of the company are very important and have been discussed in detail. The methods which are used to evaluate the different leases and the non-current assets have been also touched upon with a comprehensive view point.

References:

Annualreports.com. (2018). AnnualReports.com. [online] Available at: https://www.annualreports.com/Companies?search=billabong+company+report+2017 [Accessed 21 May 2018].

Asic.gov.au. (2018). Financial services | ASIC – Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/regulatory-resources/financial-services/ [Accessed 21 May 2018].

Aurora, B.B.C., 2013. Methods for Measuring the Impairment of Accounts Receivable. Ovidius University Annals, Series Economic Sciences, 13(1).

Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.

Digital, T. (2018). Bases and Methods of Valuation for Plant & Machinery – Marriott & Co.. [online] Marriott & Co. Available at: https://www.marriottco.co.uk/bases-methods-valuation-plant-machinery/ [Accessed 21 May 2018].

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Heaney, R. and Holmén, M., 2004. The cost of corporate control: The case of Billabong International. Accounting Research Journal, 17, pp.113-120.

Terry-Armstrong, N., 2014. Billabong: A company in financial crisis. Busidate, 22(3), p.4.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, Management and uses. Cengage Learning.