668 George Street,
Melbourne, VIC 3000
Telephone 28 8 3215 5000
www.mckenzieandassociate.com.au
08 September 2018
Mr. Con Pewter
The managing Director
Pewter Ltd.
Level 6, 510 King William Street,
Adelaide SA 5000
Dear Mr Pewter
First of all, I would like to thank you for the response provided by you through e-mail. As an accountant of McKenzie and Associates, I would like to inform you that our manager Ms Mc Kenzie requested me to reply the e-mail through letter. I would like to assure you that like the previous issues this time also our company will provide you with the best possible solutions for the issues highlighted by you. Further, it is assured that the solutions will be provided in compliance with the requirement of Corporation Act 2001, IFRS and AASB. From your communication it is seemed that the issues are related to –
For the 1st issue we will provide you suggestions regarding treatment of improving the environmental reputation as goodwill and for the 2nd issue we will provide you suggestions regarding treatment of contingent liability for the guarantee provided for damage.
In case you have any doubt, questions or query regarding the suggestions provided for the issues issues highlighted by you please reach us through official contact number or e-mail.
Yours sincerely
Ms Elle Jordan
Accountant
McKenzie and Associates
Copy Emily Edwin
Enc: Responses to issues
Cc: Maria McKenzie
Suggestions for 1st issue – Intangible assets
As per the issue highlighted by you it is regarding treatment of improving the environmental reputation and recognizing it as intangible asset under the balance sheet of the company. As per the definition provided by AASB 138, intangible asset is the non-monetary identifiable asset without any physical substance. The intangible asset are recognised when it is likely that the future economic benefit associated with the asset will be inflow for the company and the asset’s cost can be reliably measured (Gamayuni 2015). On the other hand, goodwill is the intangible asset that represents any non-physical asset that adds value to the company but cannot be valued or recognized easily. When the expenses are incurred for generating the future economic benefits but do not create any intangible asset that fulfils the recognition criteria as per the standards. This kind of expense is generally known as the contribution for internally generated goodwill (AASB 138 – Intangible Assets 2015). Though the internally generated goodwill are not recognised as asset as it is not identifiable or separable asset controlled by the company that can be reliably measured at cost. However, the internally generated goodwill is expected to increase the company’s value through enhancing the customer base, brand value, location, reputation, workforce and product quality that may have increased the company’s earning in past. However, the internally generated goodwill is not recognised under the financial statement of company. As per the scenario described by you, as per the marketing manager, the efforts of the ship, Steve Irwin will enhance the image of the company regarding environmental responsibility. This is because the company provided guarantee for repairing any damage that may cause to Steve Irwin owing to the attempt of disrupting Japanese whalers. It is expected that the environmental responsibility will enhance the brand name of the company and thereby will increase the customer base which in turn will make the company sustainable for the long-run. This can be considered as the internally generated goodwill for the company. The main issue with the internally generated goodwill is that it is not created out of any contractual obligation or legal rights. Therefore, it cannot be recognized as an asset in the financial statement as the source of generation cannot be recognized and the asset is not able to be separated. Moreover, the identification of the fact that whether and when the asset will generate any benefit is big issue. Even if it generates any benefit it is not easy to measure it reliably (Aasb.gov.au 2018). Apart from that, another major issue is that most of the times it is not possible to segregate the amount required for maintenance or enhancement of the asset from the expenses associated with regular business operations (Vetoshkina and Tukhvatullin 2014). In the given scenario, though the marketing manager is in the view that the environmental responsibility shall be recognized as goodwill in the financial statement of the company, there is no surety regarding whether the action will create any economic benefit for the company. Further, even if it creates any economic benefit it is not possible to measure the value of that benefit reliably (Sinclair and Keller 2014). Hence, this internally generated goodwill shall not be recognized as an intangible asset under the financial statement of Pewter Ltd.
Suggestions for 2nd issue – Provisions, contingent liabilities and contingent assets
AASB 137 for Provisions, contingent liabilities and contingent assets defined contingent liability as the possible obligation generated from the past events and the existence of which will be confirmed through non-occurrence or occurrence of 1 or more than 1 tentative event which will not be under control of the company. Further, the contingent liability is the present obligation generated from the past events but not reported as the outflow of economic benefit is not probable or the obligation amount cannot be measured reliably (Goodwin et al. 2016). On the contrary, provision is the liability with regard to uncertain amount or timing. Generally, all the provisions are contingent as the liabilities are uncertain with regard to amount or timing. However, the term contingent is used in terms of liability those are not recorded as their existence can be confirmed through non-occurrence or occurrence of 1 or more than 1 tentative event. Further, the term contingent liability is used for the liability that does not fulfil the criteria for recognition (AASB 137 – Provisions, Contingent Liabilities and Contingent Assets 2015). Major difference among contingent liability and provision is that in case of contingent liability the probable obligation is yet to be confirmed with regard to outflow of economic benefit. Under the given circumstance described by you, providing guarantee by the entity, Pewter Ltd on the event of any damage must be disclosed through notes to the financial statement as contingent liability. The reason behind the treatment is that the obligation has not been confirmed yet and thereby the outflows of economic benefits also are in doubt. However, if the obligation become confirmed and the company has to expense the economic resources to meet the obligation it shall be recognized as provision as the timing and amount will yet to be confirmed (Beams, Brozovsky and Shoulders 2017). Further, on confirmation of the timing and amount of the obligation it shall be recognised as expense under the profit and loss statement of Pewter Ltd.
Reference
AASB 137 – Provisions, Contingent Liabilities and Contingent Assets., 2015. AASB Standard. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB137_08-15.pdf [Accessed 8 Sept 2018].
AASB 138 – Intangible Assets., 2015. Compiled AASB Standard. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf[Accessed 8 Sept 2018].
Aasb.gov.au., 2018. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB138_08-15_COMPoct15_01-18.pdf [Accessed 8 Sept 2018].
Beams, F. A., Brozovsky, J. A., & Shoulders, C. D., 2017. Advanced accounting. Pearson.
Gamayuni, R.R., 2015. The effect of intangible asset, financial performance and financial policies on the firm value. International journal of scientific & technology research, 4(1), pp.202-212.
Goodwin, J., Atilgan, Y., Simsir, S.A. & Ahmed, K., 2016. Investor reaction to accounting misstatements under IFRS: Australian evidence.
Sinclair, R.N. & Keller, K.L., 2014. A case for brands as assets: Acquired and internally developed. Journal of Brand Management, 21(4), pp.286-302.
Vetoshkina, E.Y. and Tukhvatullin, R.S., 2014. The problem of accounting for the costs incurred after the initial recognition of an intangible asset. Mediterranean Journal of Social Sciences, 5(24), p.52.
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