Financial Reporting - International Accounting Standard - Assignment Example

Financial reporting Introduction The International Accounting Standard (IAS) 37 was introduced in the year of 1998. It sets out the accounting principles for Provisions, contingent assets and contingent liabilities. The standard clearly clarifies when these items should and should not be made. Before the issue of this standard there was great concern in this area of accounting where companies had been accused of manipulating the financial statements and of creative accounting. Question (a) The objective of (IAS) 37 The main objective of this accounting standard is to guarantee appropriate methodology for recognizing and measuring provisions of contingent liabilities and contingent assets. IAS 37 was issued in order to deal with the subjective area of provision and to prevent the use of ‘big bath provisioning’ and the practice of profit smoothing (GREUNING, 2011). IAS 37 requires that (in accordance with the definition of a liability) a provision should be made where the matter gives rise to a constructive or legal obligation and where there is a probability that there will be an outflow of economic benefits which can be reliably measured. In addition IAS 37 gives examples of how specific situations should be dealt in terms of recognition, measurement and disclosure depending on the circumstances (GREUNING, 2011). These include onerous contracts, re-organizations and restructuring costs, and environmental contamination. Evidence is required to support their classification and disclosure is appropriate under the standard. Provision by definition is a liability of uncertain amount and the timing is unknown. These obligations arise due to past events and transactions of which there settlements are believed to generate an inflow of resources to the business entity (GREUNING, 2011). Question (b) The term provision is frequently used in the accounting to describe the put aside write off the value of assets. They include; provision to put aside to be knocked off the value of obsolete inventory or value of the damaged property. This sum of amount is normally maintained for the purpose of meeting uncertain and random occurrence of loss or liability which is anticipated to happen in feature. It is however good to note that these anticipated losses and liabilities are estimates. For instance, if the current transactions indisputably result to some certain loss or liabilities of unknown value therefore provision should be made with regard to such losses in current year’s book (MACKENZIE, 2012). The provisions are made every year by simply debiting the profit and loss account without looking whether the business is making profit or loss. Mostly the provisions are made for specific items or purposes, but not to be shared among shareholders even though it reduces the profit of the company. In general these provisions are maintained in different types with specific purposes as determined by various accounting policies. They may be in the form of provision for discount for doubtful debts, provision for taxation, provision for doubtful debts, provision for repaired and renewals. The provision is very pertinent in the business undertakings because they help in meeting anticipated liabilities and losses with regard to specific items of transactions (ZÜLCH, 2012). They are also necessary in order to present financial statements without any miss presentation and to report true and fair view of financial position (GREUNING, 2011). However, disclosure is not required if payment is remote. Question(c) Contingent Liabilities Contingent liabilities are obligations which the feasibility of happening depends on whether some uncertain random future event takes place or happening of present expectations whose payment is not likely known or the total sum cannot be measured dependably. The settlement of these liabilities is expected to result in an outflow of entity resources. It requires that enterprises should not recognize contingent liabilities - but should disclose them, unless the possibility of an outflow of economic resources is remote (GREUNING, 2011). Contingent liability occurs whenever possibility of an even is confirmed by future events which are not within the control of the entity. Present obligations sometimes may require an outlay of resources however it is very rare to sufficiently provide a reliable estimate a mount of such as highlighted bellow. Description Treatment Probable and subject to reasonable estimation Record in financial statements Reasonably possible Footnote Remote No required disclosure Question (d) Contingent Assets Contingent assets are assets with the probability to arise from past events, and whose certainty will be long-established only by the happening or non-happening of one or more indecisive future events not entirely within the powers of the enterprise. Contingent assets normally are not recognized but are disclosed whenever an inflow of economic profit is feasible. And again when the realization of income is practically definite, then the related asset is not a contingent asset and its recognition is appropriate GREUNING, (2011). Contingent asset arises when the inflow of economic payback is apparent, but not virtually definite, and happening depends on event outside the control of the entity. The disclosures of these assets are only required if the realization of such revenue is practically certain, the interrelated asset is not a conditional asset and recognition is therefore appropriate. Question (e) Adjusting event The adjusting event is the event that does happen after the presentation of comprehensive statement of financial position. They provide evidence concerning the occurrence if conditions at the balance sheet date. For instance if the evaluation of an asset reveals a material impairment suffered at the balance sheet date or insolvency of a debtor who had been included in the list of current assets in the balance sheet after presentation of the financial statements (ZÜLCH, 2012). The happenings of such adjusting material event normally require appropriate adjustment of the particular item in the financial statements. This is very necessary for true and fair presentation of financial statement (GREUNING, 2011). It also prevents the stakeholder from being misled as this may influence their economic decision. The event suggests that the going concern assumption with regard to the part or the whole enterprise is not appropriate. Adjust the financial statements if the going concern assumption is in doubt. Question (f) Non adjusting event These are indicative events after the balance sheet date showing conditions that happens by the end of reporting period (GREUNING, 2011) It is the responsibility of the management director to examine the going concern assumption and present the financial statements in that regard.The enterprise is normally viewed as a going concern, that is, it is continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operations (ZÜLCH, 2012).If fundamental accounting assumptions are not followed in the preparation and presentation of financial statements, the fact should be disclosed. If these are followed, no specific disclosure is necessary (GREUNING, 2011). These are called fundamental because these are to be followed and their disclosure in the financial statements is required if these are not followed (ZÜLCH, 2012). Otherwise there is no conflict between accounting concepts and fundamental accounting assumptions. In fact, fundamental accounting assumptions are part of the basic accounting concepts. Report To: Board of Directors Amazon Ltd From: Regarding: Financial Statements for the year ending 31 October 2012 Introduction The board of directors is required to prepare and present the financial statements for the accounting period of trade that gives true and fair view of the state of affairs of the company as at the end of the financial year. The profit and loss for the trading period is disclosed in a faithful manner. It also requires the board of directors to ensure that there are proper accounting records that disclose with reasonable accuracy, the financial position of the company. The proprietor is also responsible for safeguarding the assets of the business. The board of directors is required to accept these responsibilities of preparation of management of financial statements that they are free from material misstatement whether due to fraud or error. The board of directors also should acknowledges their responsibility for designing, putting into action, and maintaining proper internal control system which are appropriate to the preparation and fair presentation of the financial statements. The board should selected and apply appropriate accounting policies and making accounting estimates together with judgments that are reasonable in the circumstances. In my report the fundamental uncertainties which are inevitable in accounting are as follows: 1). Restructuring cost Restructuring Provision Expenses Sep-12 Oct-12 €000 €000 Redundancy costs 5,500 – Lease Cancellation 750 – Retraining – 120 Investment in new systems – 100 Total 6,250 220 Debit SOCI €6,250,000 Credit SOFP €6,250,000 Amazon Ltd redundancy cost and Lease Cancellation are legal or constructive obligation. The company will expect to give the employees their benefits of €5,500,000. Lease cancellation may also go against the terms and conditions of the contract. Whereas, retraining costs and Investment in new systems costs are probable transfer of economic benefits. They would create an expectation that the company will honor its policy as resolved during the meeting. The liability that it creates is rather tricky. On the other hand Lease cancellations may a rise to either of constrictive obligation or legal obligation in case of operating lease and fixed lease respectively. It is therefore appropriate to create a provision for €6,250,000 because they are reliable estimates. In line with International accounting standard (IAS) 37 Provision, Contingent Liability, and Contingent Assets, requires the recognition. The decisions to Retraining and Investment in new systems constitute contingent assets and they are viewed as business decision risks. These risks are seen as needless clutter and do not require any disclosure however they are directors are not discouraged if any case there is a feeling for such. This also applies to contingent assets with gains that are almost never acknowledged before inflows are actually received. Therefore the investment should not be recorded as a benefit or an asset. 2) Fire tragedy This tragedy appears to have the aspects of contingent asset. Due to the fact that the premises was insured, according to International Accounting Standard Board (IASB) analyzes this problem as two separate situations. Where never there is a single item claimed, it is measured in isolation and often leads to a disclose-able contingent asset unless the chances of a claim are considered to be negligible. And again if there are a number of similar items, they should be considered as a whole. Therefore warehouse and his contents would be considered whole with the value of €3.5 million should be disclosed in the foot note when presenting financial statement to the shareholders. 3) The repair warranty liability If it is the policy of the company to provide for a repair warranty this arise to constructive liability. The estimated warranty cost should be recorded as an expense. And the offsetting credit entry should go to warranty liability account, when the repair is performed, such accounts shall be reduced and corresponding cash account or any other resources is credited inline with matching principle.   R/W Liability account   work performed 55,000 beginning balance 125,000   Additional accrual) 275,000 Ending balance 345,000 400000 400000 4). Demolition of the warehouse The probable demolition of the warehouse due to breach of law of planning is a legal dispute and therefore the outcome may give rise to amiability in terms of fine and eventually the company may loose the established new warehouse. Even though the construction cost is known timing and the amount of the fine is uncertain. In this case the demolition of the building will form firm’s specific risk on the other hand the fine if any will form general business risk. In general business risks there will no financial treatment that will be made in advance. However, they should be disclosed in the published financial statements. This incident appears to have the attributes of contingent liabilities. If Amazon Ltd is under investigation by the regulatory authorities for a breach of planning laws, the results are unknown. This is because it may rise to legal obligation which may cause the company to lose substantially if the established structure is demolished. This may mean that Amazon Ltd will lose newly constructed warehouse facility. The chances of Amazon Ltd winning the case arising is very slim due to experience got when the other company who was found guilty of similar offence in 2011 was fined and demolished the structure. Conclusion This report has been prepared in line with international financial reporting standards. Therefore the board of directors and any other user should be able to understand. However, if any case there is difficulty with regard to this report then clarity or elaboration shall be provided where necessary. This will boost the confidence of the investors and other stakeholders. The statements should also maintain a going concern assumption for at least 12 months from the date of this statement. Reference GREUNING, H. V., SCOTT, D., & TERBLANCHE, S. (2011). International financial reporting standards a practical guide. Washington, D.C., World Bank. http://site.ebrary.com/id/10460979. MACKENZIE, B. (2012). Wiley IFRS 2012 interpretation and application of international financial reporting standards. Hoboken, N.J., Wiley. http://www.myilibrary.com?id=342525. ZÜLCH, H. (2012). International financial reporting standards 2012: the official standards and interpretations approved by the EU. Weinheim, Wiley-VCH. Read More