Contingencies and Provisions
Discuss about the Information And Financial Statements Analysis.
In this particular assignment, the issues pertaining to accounting is presented in context of Fairfax media. The analysis has been done for evaluating whether the accounting facts and figures are presented in compliance with the prescribed accounting standard so that the financial statements prepared are reliable for its internal as well as external users. For this purpose, data and facts have been extracted from the annual report for year 2017.
Contingency refers to the liabilities and assets that are not accounted in the business and have happened on an urgent basis. Disclosure of contingences is done by segregating into number of financial components in the financial statements. In the financial report, contingencies are disclosed by presenting in sub heading such as guarantees and defamation. Amount of contingencies are disclosed net of GST amount that is payable or recoverable from taxation authority (Armstrong et al. 2015).
Recognition of provision is done by the group when it has constructive or legal obligations for sacrificing the future benefits resulting from past events or transactions. For future operating lease, no provisions are required by organization. Measurement of provision is done using the discount cash flow methodology at the present value of best estimate of expenditure that is required for setting the present obligation. Risks pertaining to prison are factored into cash flow using a discount rate. Recognition of any amount of provision resulting from past events and with passage of time is recognized as finance cost. Unless the dividends are declared, there is no recognition of provision for dividend as liability.
The measurement issues and recognition criteria in association with contingencies and provisions are discussed below:
The carrying value of guarantees is measured at fair value in accordance with AASB 137. Reporting entities in the group are sued for defamation and any other similar matters in the ordinary course of business. In regard to any undrawn letter, entity recognized the letter of credit that is not limited to insurance or leases.
Measurement of provisions is based on estimates that will be used for setting the obligations at the current reporting period. Current assessment of market situation and other associated risks is reflected in the discount rate that is used for determining the present value of pre tax rate.
The contingencies that are disclosed in the annual report of Fairfax limited can be referred to defamation and guaranteed. Any deficiency of funds is guaranteed by certain controlled entities and the company in the event when entity to class order is wound up. At the reporting date, there foes not exists any such deficiency. Defamation is about to sue entities from time to time in event of any defamation. There was no legal action at the reporting date against the consolidated entity except some of the items that have a material impact and is mentioned in the notes to financial statements. In event of acquisition, any contingent consideration is recognized at fair value and is transferred by the acquirer. Any change in the fair value of consideration that is deemed to be liability is recognized in the income statement according to AASB 139.
Recognition Criteria and Measurement associated with provision or contingent liability
It is indicated by the image below that plant and equipment are under the finance lease with total value of leasehold building at $ 36839 in year 2017.
Figure: Property plant and Equipment
(Source: Fairfax.ca 2018)
The group in addition to leasing the building has entered into commercial lease on warehouse and office premises, office equipment and motor vehicles. Total amount of operating lease commitments stood at $ 544869 as on June, 2017 (Fairfax.ca 2018). Accounting policy pertaining to lease is that any amount of net rental payments will be recognized as expense on a straight line basis in the income statement. This would not include the amount relating to contingent payments.
Lease commitments:
(Source: Fairfax.ca 2018)
Leases of organization are treated according to the accounting standard AASB 16 that is effective from January, 2013. With reference to these particular lease standards, all the items of lease having a term of over 12 years are recognized in the balance sheet. The measurement of liabilities for leased payment and any corresponding right to use assets is done at present value of the amounts that is expected to be paid over time. In addition to this, the classification of lease as operating or financial lease will form the basis of cost recognition of such leases in the income statement. Operating lease cost over the lease term will be recognized as single operating expense on straight line basis and financing lease on other hand is recognized both as an interest and operating expenses after disaggregating such lease.
Figure: Balance Sheet
(Source: Fairfax.ca 2018)
The hypothetical situation where reclassification of leased items would be required can be explained by presenting the issue. Some of the examples depicting the situation of leased items reclassification are listed below:
- It is experienced by lease to have the option of purchasing the assets at a price that is below the fair value o assets and it is at an expected price.
- It is resulted by lessors to have the ownership of assets transferred to the lease by the end of lease term.
- Leases are enabled as indicated by the nature of leased assets to perform the incorporation without making any major modifications.
In this particular question, details of particular noncurrent assets have been asked to evaluate along with explaining the valuation of the same. The particular asset that has been selected from the statement of financial position under the heading in current assets is receivables. Receivables are the amounts that are yet to be received from debtors of company. Total amount of receivables that have been recorded in the statement stood at $ 7897 in year 2017 compared to $ 3126 in year 2016 indicating that there is considerable increase in total amount of receivables attributable to company (Fairfax.ca 2018).
The statement of financial position of group as on 25th June, 2017 involves a non current asset relating to party loan receivable that is due from equity investee that is Stan entertainment Pty limited. It has been evaluated that the recognition criteria as outlined in the AASB 139 Financial instruments are met by loan receivables.
Contingency recorded
Receivables:
(Source: Fairfax.ca 2018)
The financial report of reporting entity reflects the valuation methodology that is used for valuing the receivables. Recognition of receivable is initially done at fair value that is measured subsequently at amortized cost. Such amortized cost is the original invoice by deducting allowance for any amount that is not collected. All receivables other than trade debtors are not past due and they are not taken into consideration by management for the purpose of impairment. Total amount of receivables that is written off as uncollectible stood at $ 1770 as against $ 1616 (Fairfax.ca 2018). Trade receivables collectivity is reviewed on an ongoing basis and provision regarding the same is made when it seems that debts will not be collected. On the revaluation of noncurrent assets, organization makes use of assets revaluation reserve that is used for recording any decrements and increments in the value on noncurrent assets.
An alternative method that can be used for valuing the noncurrent assets with reference to the qualitative characteristics would be the valuation using historical cost or taking into account fair value methodology. Implementation of these two measures that is fair value and historical cost, would have the consequence of increasing the valuation of any specific account that would be impacted negatively. However, it would be suitable to use the technique of fair value compared to valuation using the historical cost. It is due to this particular fact that the accounting board refers organization to employ the method of fair valuation for measuring the noncurrent assets.
Conclusion:
A detailed analysis of various accounts to financial statements of Fairfax limited has been presented in the report by referring to the annual report. Evaluation of several accounts such as contingencies, provisions, noncurrent assets and valuation methodology has been discussed and based on findings, conclusions have been drawn. It can be inferred from the above analysis that reporting entity has more or less adhered to several accounting standards when evaluating accounts as recommended by the accounting standard board. It is indicative of the fact that accounting statements have been prepared with due care and diligence. However, it has also been ascertained that there are not detailed disclosure regarding the valuation technique of some noncurrent assets and proper disclosure in relation to contingencies. It is therefore recommended to enhance the disclosure and make further improvement in quality of financial reporting.
References list:
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Fairfax.ca. (2018). Fairfax – Financials – Annual Reports . [online] Available at: https://www.fairfax.ca/financials/annual-reports/default.aspx [Accessed 21 May 2018].
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