A commercial loans is the arrangement which is based on the debt ad exists between the business and the financial institution which is used for the purposes of funding the majority of the capital expenditures and also covers the various operational costs that the company would not be in a position to afford otherwise.
There are many of the upfront costs and the regulatory hurdles that holds back these smaller businesses from having a direct access to the markets of debt and equity for the purposes of financing. This is somewhat similar to the consumer credit, smaller businesses also rely on the lending products such as the line of credit, loans that are unsecured in nature and also the term loans (AASB, 2017).
Since, the commercial loans forms a part of the liability, they must be recorded as a liability of the company under the heading of non-current liability in the financial statements (Wiley, 2017).
b: The ASIC’s allegation regarding Bank Bill Swap Rate (BBSW) would be termed as a contingent liability since these are the potential liabilities. This may or may not arise. And also these depends on the future events of the company. The main examples of a contingent liability includes the warranty of the products of the company, the guarantee of the party loan of the company and the law suits that are filed by the other parties as against the company. These contingent liabilities hence are the potential liabilities and since, they depend on the future events that occurs or that may not occur, so they become the future actual liability (Accounting coach, 2017).
The rules of accounting for these contingent includes the fact that if there is a contingent loss, which is probable and if the amount of that loss could be estimated, then the company would record that liability on the balance sheet along with the loss in the statement of profit and loss.
In case, the contingent loss is remote, then there would be no liability or loss which is recorded and there would be no need to report the same in the financial statements. In case, the contingent loss lies somewhere in the between, then the same would be disclosed in the notes to the financial statements (Marssd, 2017).
The contingent liabilities are not recognised in the balance sheet but are disclosed in the notes to the financial statements since there is a remote possibility of settling the same as the possible obligation.
Hence, the liability that would be the result of that allegation by ASIC would form the part of the notes to the financial statements.
c: The risks include the fair values and the hedging and derivatives.
All of the financial instruments are reported at the fair values and when it comes to the estimation of the fair values, then the group would use the market prices that are quoted in the market for the financial instrument. If there is no active market for that financial instrument, then the same would be based on the fair value which would be based on the estimates of the fair value or other of the techniques that are widely accepted in the market. The valuation models that are used in the stated case assesses the impact of the bid and ask spread along with the counter party credit spreads and also many of the factors that influences the fair value which has been determined by the participants in the market. The selection of the most apt valuation techniques along with the methodology and the inputs requires the use of the judgment. These are reviewed and are also updated as the market practices changes.
The other risk is the risk involved in the derivatives and hedging. The bans sells these as a part of their daily operations and also hedges the risk associated with the rate of interest, price risk, credit risk and also other such exposures that are connected with the non-trading positions. The hedging instruments have been designed for the purposes of deriving the fair values and also the cash flows that is expected to be offset as against the changes in the fair value or the cash flows of the designated hedged item. Any items which has bene hedged is an asset, liability, firm commitment and also there is a high probability of the forecast of the various transactions that exposes the bank to the changes in the fair values and also of the future cash flows, are designed as being hedged.
A judgement is required for the purposes of selecting and designating the hedging relationship and also when it comes to the assessment of hedge effectively. IAS 39 with relates with the financial instruments includes the recognition and the measurement that does not specify any one single method for the purposes of assessing the effectiveness of the hedge prospectively or retrospectively (ANZ annual report, 2016).
The amount of the fine would be included in the financial statements as a current liability since a current liability is the liability of the entity which is classified as current as and when the same expects to be settled as a liability in the normal operating cycle, it holds the liability mainly for the purposes of trading, as and when the liability is due to the settled within the period of 12 months after the date of reporting. Also, when there is an unconditional right that defers the settlement of the liability for the period of 12 months after the date of reporting. It is the liability that is at the option of the counterparty and is also the result of the settlement by the issue of the instruments of equity which does not affect the classification of these equity instruments. Then, in such cases, the entity would classify the same as a non-current liability (AASB, 2017).
b: The contingent liabilities are not recognised in the balance sheet but are disclosed in the notes to the financial statements since there is a remote possibility of settling the same as the possible obligation.
It is the liability which has the possible obligation of the payable contingent which is based on the future course of the events which is not in the control of the entity or which has the present obligation of not currently deeming to be probable or not measurable with some of the sufficient liability. In respect of these contingent liabilities, an estimation of the financial effects will have to be made and also there would be an indication of the various uncertainties that are involved which includes any reimbursement is possible. In case, these disclosures are not possible, then a statement as to why the same is not possible must be made (Wiley, 2017).
Hence, the investigations would be reported as a contingent liability for the company.
Writing off is the accounting term that refers to the action wherein the book value of the asset would be declared as 0. A write down is the lowest asset book value. But t would not take the value as 0. In any of the case, the loss would always enter into the system as an expense.
The bad debt written off by the company is included in the income statement under the head of credit impairment change under movement in provision for credit impairment by financial class asset (Business case analysis, 2017).
Generally, the following entry is passed for the bad debt expense.
|
Debit |
Bad Debt Expense |
|
Credit |
Receivable |
The credit item reduces the balance of the receivables to nil since none of the amount that is to be recovered from the receivables. The debit is the entry which has the effect of cancelling the impact on the amount of the profit of the sales that were being recognised initially in the statement of income (Accounting simplified, 2017).
b: In the absence of the account of the balance sheet, allowance of the uncollectible amounts, all of the accounts receivables are considered to be collectible and there is as such no bad debt expense which is reported in the statement of income until and unless the account receivables amount is written off.
As and when the account allowance for the uncollectible accounts are reported in the balance sheet, then the company considers that there are some of the accounts receivables that would not be collected. In the other words, there would be a knowledge wherein it would be specified the account which would not be collected. The company would debit the expense of the bad debt and also credit the allowance for the amounts that are considered to be uncollectible. This is the result of the expense in the income statement along with the reduction of the current assets on the face of the balance sheet (Accounting coach, 2017).
As and when a sale is entered into, then the sales are credited and the cash or the accounts receivables are debited. When cash is paid in respect of this sale, the cash is debited and the accounts receivables is credited thereby reducing the accounts receivables. But when there is a bad debt expense for the amount of the accounts receivables, then the income of the company for that year would get reduced since the accounts receivables have gone bad plus the accounts receivables have also reduced. This results in the loss for the company and hence, the income of the company gets reduced. When the income of the company gets reduced, the statement of equity reports are reduced income due to which there is a decrease in the amount of the income in the reserves and surplus. Then, since the profit of the company is reduced, there is a loss of dividend for the company and also of the shareholders.
References:
AccountingCoach.com. (2017). Balance Sheet Liabilities | AccountingCoach. [online] Available at: https://www.accountingcoach.com/balance-sheet/explanation/2 [Accessed 11 May 2017].
AccountingCoach.com. (2017). What is the effect on the income statement when the allowance for uncollectible accounts is not established? | AccountingCoach. [online] Available at: https://www.accountingcoach.com/blog/allowance-uncollectible-accounts-receivable [Accessed 11 May 2017].
Accounting-simplified.com. (2017). Accounting for Bad Debts – Explanation and Examples. [online] Available at: https://accounting-simplified.com/accounting-for-bad-debts.html [Accessed 11 May 2017].
MaRS. (2017). Financial statements: The balance sheet | Assets, liabilities & equity. [online] Available at: https://www.marsdd.com/mars-library/reading-financial-statement-balance-sheet-assets-liabilities-equity/ [Accessed 11 May 2017].
Schmidt, M. (2017). Writing Off Assets and Bad Debt in Accounting Explained. [online] Business Case Web Site. Available at: https://www.business-case-analysis.com/write-off.html [Accessed 11 May 2017].
www.aasb.gov.au. (2017). Presentation of Financial Statements. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed 11 May 2017].
www.aasb.gov.au. (2017). Presentation of Financial Statements. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf [Accessed 11 May 2017].
www.anz.co.nz. (2017). Annual report 2016. [online] Available at: https://www.anz.co.nz/resources/0/e/0ee9cd87-9ebb-4afe-941c-c4215f36b258/ANZB-DS-Sep15.pdf?MOD=AJPERES [Accessed 11 May 2017].
www.dlsweb.rmit.edu.au. (2017). Financial statements. [online] Available at: https://www.dlsweb.rmit.edu.au/toolbox/balanceact/toolbox11_06/units/assets_inventory/html/legis_aasb101.htm [Accessed 11 May 2017].
www.johnwiley.com.au. (2017). AASB 101 Presentation of Financial Statements. [online] Available at: https://www.johnwiley.com.au/highered/aas2e/content029/fact_sheets/AASB101_ch19.pdf [Accessed 11 May 2017].
www.johnwiley.com.au. (2017). AASB 137 Provisions, Contingent Liabilities and Contingent Assets. [online] Available at: https://www.johnwiley.com.au/highered/aas2e/content029/fact_sheets/AASB137_ch05.pdf [Accessed 11 May 2017].
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