Disclosure Of Contingent Liability And Lease Accounting In Financial Statements

Factors to Consider in Disclosing Contingent Liability

Factors that could be considered in determining the form the disclosures that should be taken and the period of years the disclosures would be made

Contingent liability: This is a form of commitment that depends on the occurrence of the future events which may either happen or not. If a contingent liability that is considered to be both probable and the amount can be estimated with reasonable certainty is basically to be recorded as a loss or expense in the income statement and also as a liability in the company balance sheet (Annan, 2014). It can be noted that if a contingent that is probable but the amount cannot be recorded in the financial accounts, but will be disclosed in the notes to the financial statements. Furthermore, a contingent liability that is very remote that may happen in future need not to be recorded as well as disclosed in the notes section of the financial statements. In this particular case, the factor that needs to be considered is that CBA has settled with the investors for A$50 Million and agreed to pay A$1.5 Million. Therefore, the settlement has occurred that is not contingent (Buchman, Harris, and Liu, 2016). The entry for payment for A$50 Million must be demonstrated as an expense in the income statement for the company. The nature and details of this particular transaction should also be given in the notes for the readers to have a better understanding of the item.

Provision must be made in the account for A$1.5 Million which is an amount not paid but agreed upon, and the obligation must be made in the statement of financial position. The details of this particular transaction must be provided in the notes sections for easy understanding (El-Gazzar, Lilien, and Pastena, 2008). The accounting treatment as above and such disclosures must be included in the financial statement for the FY2012 which is considered to be the year of the transaction. Since this item is considered to be significant and repetitive, complete disclosures must be made in the director’s report and the action plan that would be implemented in future so as to ensure that such incidents do not repeat itself. 

Annan, M., 2014. The Case of Lease Accounting (Doctoral dissertation, University of Amsterdam).

Biondi, Y., Bloomfield, R. J., Glover, J. C., Jamal, K., Ohlson, J. A., Penman, S. H., …

Wilks, T. J. 2011. A Perspective on the Joint IASB/FASB Exposure Draft on Accounting for Leases: American Accounting Association’s Financial Accounting Standards Committee (AAA FASC). Accounting Horizons, 25(4), 861-871.

Buchman, T. A., Harris, P., & Liu, M. 2016. GAAP vs. IFRS Treatment of Leases and the Impact on Financial Ratios.

Deegan, C. (2012). Australian financial accounting. McGraw-Hill Education Australia.

El-Gazzar, S., Lilien, S., & Pastena, V. 2008. Accounting for leases by lessees. Journal of Accounting and Economics, 8(3), 217-237.

Ji, S. and Deegan, C., 2011. Accounting for contaminated sites: how transparent are Australian companies?. Australian Accounting Review, 21(2), pp.131-153.

Grenier, J. H., Pomeroy, B., & Stern, M. T. 2015. The effects of accounting standard precision, auditor task expertise, and judgment frameworks on audit firm litigation exposure. Contemporary Accounting Research, 32(1), 336-357.

Riccardi, L., 2016. Accounting Standards for Business Enterprises No. 3—Investment Real Estates. In China Accounting Standards (pp. 25-29). Springer Singapore.

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.