Discuss about the Financial Reporting of Tiger Resources Limited.
According to Hennes (2014), contingent liabilities and assets refer to the future potential assets and liabilities; on the other hand, provision refers to the saved amount that is kept aside to cover the future liabilities. The financial report of every company includes these two above mentioned components of accounting. The Australian Company, Tiger Resources Limited has been taken to evaluate several aspects of contingency and provisions. The main operation of the company is to discover, develop and explore copper or cobalt deposits. The various stages of this reports helps to show various relation between contingency and provision with proper example from the 2015 Annual Report of the company (www.tigerresources.com.au 2016).
As per the guidelines of Australian Accounting Standard Board (AASB), there are some specific criteria to recognize the provisions and contingent liabilities or assets of a company. The criterion which is followed by Tiger Resources Limited is discussed below:
As per the 2015 Annual Report of Tiger Resources Limited, the company follows certain rules while recognizing the provisions. There are three kinds of provisions in the company that is legal claims, good obligations and service warranties. These provisions are recognized when the company has a recent obligation due to the occurrence of some past events (Elder et al. 2016). Naturally, these events will cause the outflow of cash from the company as these obligations needs to be settled. For the settlement of obligation, Tiger Resources Limited uses to make the provision out of the profit of the company. There are no rules for provision for the future losses of the company. The amount of money of the provision is based on the nature of the obligation. There are both small and big amount of provisions in the company (www.tigerresources.com.au 2016).
Tiger Resources Limited has been following the guidelines of AASB to recognize the contingent liabilities and contingent assets. The company will consider an event as contingent liability when there is a potential of cash outflow in the near future due to some pat events. Unlike the provisions, it is not always necessary that there will an outflow of cash in contingent liabilities. There is a possibility of reimbursement (Barker and McGeachin 2013). On the other hand, if there is a possibility of cash outflow in the near future due to some past events, the event will be considered as contingent assets. Contingent assets and liabilities do not appear in the balance sheet of the company (www.tigerresources.com.au 2016).
There are certain differences exist between the provisions and the contingent liabilities. The difference starts from the definition. Provision is the guaranteed cash outflow due to some incidents. On the other hand, contingent liabilities indicate the potential outflow of cash due to some past events. In case of provisions, the obligation is present that demands the outflow of resources in the near future. Thus, here the liability is recognized. However, there is an obligation present in the contingent liabilities, but the liability is not recognized. Hence, there may be a future cash outflow. The possibility of outflow of resources is remote here (Lagrange, Viger and Anandarajan 2015).
The amount of future cash flow in case of contingent liabilities can be estimated in provisions; but in most of the cases, the amount of cash outflow cannot be estimated in contingent liabilities. The provisions are considered as expenses and they are shown in the Profit and Loss A/c of the company. On the other hand, the contingent liabilities are not considered as the proper liabilities of the company. Thus, they are shown as footnotes under the balance sheet of the company. These are the basic differences between provision and contingent liabilities (www.aasb.gov.au 2016).
There are certain cases in the Annual Report of Tiger Resources Limited which can be considered as the contingent liability and provisions. One example from each aspect of Tiger Resources Limited is discussed below:
The example of Tiger Resource Limited’s contingent liability is the amount of income tax return for the year ended 31st December, 2014. The tax amount in that period is under review by the rules of standard annual tax audit procedure. The company has received notice from the tax department after paying the tax for the financial year 2012 and 2013. As per the company, there is no legal obligation that the company has to pay the tax. However, there is still a chance that the company may need to pay the tax amount in the near future. This tax case of Tiger Resources Limited has a future uncertainty whether the company has to pay the amount or not. This situation is the perfect example of a contingent liability. The amount is not fixed. On the other hand, there is an uncertainty over the payment of the taxes. This is a perfect example of contingent liability in the books of Tiger Resources Limited. This amount will not appear in any financial statement of the company, but will be shown under the balance sheet as footnote (www.asx.com.au 2016).
Provision refers to the saving of money or resources for the future events of the companies. As per the 2015 Annual Report of Tiger Resources Limited, there are non-current provisions in the company. According to the 2015 Annual Report of the company, the amount of non-current provision for the year 2014 is $ 5,609,000 and for the year 2015 is $ 3,598,000. Among the amount of 2015, there are three slabs. They are employee benefits – long leave provisions, rehabilitation provision and other provisions. From the above stats, it can be seen that the provision amount of 2015 is less that the amount of 2014. That means the company has a well defined provision management plan. It is not desirable to have a big amount of provision as provisions always make the net profit small. There is a gap of $ 2,011,000 ($ 5,609,000 – $ 3,598,000) between 2015 and 2014. This is a huge improvement for Tiger Resources Limited (www.tigerresources.com.au 2016).
There are certain measures of valuation of the provisions and contingent liabilities or assets. These measures have been developed by the Australian Accounting Standard Board (AASB). Based on the kind of operation, the companies choose their own measures of valuation of provisions and contingents (Walker 2012). The measurement processes are discussed below:
Tiger Resources Limited measures the provisions on the basis of present value. The management first predicts the best value of the provision which is required to settle down the obligations and the uses the discount rate to assess the present value of the provisions. This measure includes various aspects. To assess the present value, the time value of the money is calculated. On the other hand, the risk involved in the process needs to be analyzed. After using the discount rate, the pre tax value of the provisions can be obtained. In the case of rehabilitation provision, the same method is applied that is the present value method. The obligations of provision must be settled on the balance date (Barth 2013).
The rise of contingent assets and liabilities depends on the occurrence of some future incidents. There is not any rule of showing the contingent assets and liabilities in any financial statements. However, they are shown as the footnotes under the balance sheet. Thus, there are not any specific criteria to measure the contingent liabilities and assets. Tiger Resources Limited has adopted the fair value method to calculate the amount of contingent assets and liabilities. In his method, Tiger Resources Limited uses to calculate the value of contingent liabilities at the time of settlement by using the discounting factor and obtain the value of the liabilities (Jin, Shan and Taylor 2015).
These are the applied criteria used by Tiger Resources Limited to ascertain the value of provisions and contingent liabilities or assets. From the above discussion, it can be concluded that Tiger Resources Limited use fair value as well as present value method for the calculations.
As per the above discussion, it can be concluded that provisions and contingents are the two very important aspect of the business. The accountants must take into consideration these aspects while preparing the annual report of a company. It is quite obvious that when a business is operating, it will some unresolved cases. On the other hand, these cases must be resolved in near future and for that reason there should be precautions in the form of provisions and contingents. Both provisions and contingents have the same meaning to some extent. However there is a huge gap between provision and contingents. In other words, provision is certain where contingents are not certain. There are two examples given from the 2015 Annual Report of Tiger Resources Limited. The first example is about the contingent liability of the company and the second example is about the accounting provisions of the company (Hausman 2012).
In the first example it has been shown that there is an unresolved case exists in the 2015 Annual Report of Tiger Resources Limited. The case is about the return of income tax for the financial year 2014. The matter is under the review of the tax and audit authority. Tiger Resources Limited has considered the total amount as contingent liability. That means there is a probability that the company either has to pay the money in future or not. In case of contingent liabilities, cash outflow is uncertain. Thus, the company will show the amount of money in the footnotes under the balance sheet. This amount will not create any impact on the current financial position of the company. However, it can create an impact in near future if the money has to be paid (Richardson, Taylor and Lanis 2013).
In the second example, the provision amount of Tiger Resources Limited for the years 2014 and 2015 has been shown and analyzed. It has been seen that the company has provisions for various purposes like employee benefits, rehabilitation and others. As per the 2015 Annual Report of the company, the amount of provision has become less in the year 2015 compared to the year 2014. It indicates a prospects future of the company in provision management. As the provisions are made out of the net profit, it is desirable that there is less amount of Provision. Hence, in near future the company should take more corrective measures so that there is little amount of provision for the company (Arslanalp and Liao 2014).
References
aasb.gov.au.(2016).admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf [Accessed 28 Sep. 2016].
Arslanalp, S. and Liao, Y., 2014. Banking sector contingent liabilities and sovereign risk. Journal of Empirical Finance, 29, pp.316-330.
asx.com.au. (2016). asxpdf/20150331/pdf/42xn4kykjjrzvy.pdf. [online] Available at: https://www.asx.com.au/asxpdf/20150331/pdf/42xn4kykjjrzvy.pdf [Accessed 28 Sep. 2016].
Barker, R. and McGeachin, A., 2013. Why is there inconsistency in accounting for liabilities in IFRS? An analysis of recognition, measurement, estimation and conservatism. Accounting and Business Research, 43(6), pp.579-604.
Barth, M.E., 2013. Measurement in financial reporting: The need for concepts. Accounting Horizons, 28(2), pp.331-352.
Elder, N., Penm, M., Pallerla, H., Meulen, M.B.V., Short, A.D., Diers, T., Imhoff, R.J., Wilson, B. and Boone, J.M., 2016. Provision of Recommended Chronic Pain Assessment and Management in Primary Care: Does Patient-Centered Medical Home (PCMH) Recognition Make a Difference?. The Journal of the American Board of Family Medicine, 29(4), pp.474-481.
Hausman, J.A. ed., 2012. Contingent valuation: A critical assessment (Vol. 220). Elsevier.
Hennes, K.M., 2014. Disclosure of contingent legal liabilities. Journal of Accounting and Public Policy, 33(1), pp.32-50.
Jin, K., Shan, Y. and Taylor, S., 2015. Matching between revenues and expenses and the adoption of International Financial Reporting Standards.Pacific-Basin Finance Journal, 35, pp.90-107.
Lagrange, B., Viger, C. and Anandarajan, A., 2015. Contingency liabilities: The effect of three alternative reporting styles. Research in Accounting Regulation, 27(2), pp.119-128.
Richardson, G., Taylor, G. and Lanis, R., 2013. The impact of board of director oversight characteristics on corporate tax aggressiveness: An empirical analysis. Journal of Accounting and Public Policy, 32(3), pp.68-88.
tigerresources.com.au. (2016). aurora/assets/user_content/File/01733774%281%29.pdf. [online] Available at: https://www.tigerresources.com.au/aurora/assets/user_content/File/01733774%281%29.pdf [Accessed 28 Sep. 2016].
Tigerresources.com.au. (2016). Tiger Resources. [online] Available at: https://www.tigerresources.com.au/company_profile.7.html [Accessed 28 Sep. 2016].
Walker, R.G., 2012. Permissive and Uninformative Reporting of Clean-Up Costs. Contemporary Issues in Mining: Leading Practice in Australia, p.143.
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