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MELBOURNE, VIC 3000
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Magenta and Associates has always shown self-conceit on providing the quality
decision making process to assist your accounting team with some best advice relating
to your accounting issues. As we had discussed on phone call and the email sent
on 13 November 2017 concerning about the accounting issues going on your
company, with great interest our company has some best decisions regarding
legal advice for your company. As per your request, we have mentioned some
legal information with major understanding of Corporation Act and AASB’s.
fact that, while we were looking for the issues you wrote us about the patent
infringement and revenue, we have bring up those obligations with AASBs
compiled standards i.e. AASB 137: Provisions, Contingent Asset and Contingent
Liabilities and AASB 118 Revenue which identifies conditions in which revenue
is known and deliver practical guidance on application of the recognition
criteria which falls under AASB 101: Presentation of Financial Statement with
compliance with IAS 37 and IFRS as required.
Accounting standard AASB 137, the objective of this standard is to make sure
that measurement bases are used to provisions in which regarding the issues we
should focus on either to disclose as a provision or contingent liabilities or
exclude the contingent assets. And also, with that sufficient information it
makes the clients’ Magenta and Associates Mr. Christopher Sampson understanding
of their nature, amount and timing. For more information and better
understanding, a provision is the future liability that is put on side in
account and recognized on the balance sheet and then expensed on the income
statement which have the risk and uncertainty of effectiveness of amount and
timing about the future expenditure required in settlement whereas contingent
liabilities is an obligation which is payable only in a future event which is
too remote in the company’s control or a present obligation with insufficient
consistency which is unexpected and unmeasurable (AASB137).
In the case
of a competitor suing for patent infringement and claiming compensation of $87
million at October 2017 when your company was in strong financial position at
30th June 2017. The hearing for the disagreement has not been
scheduled until July 2018. As your legal advisor was of opinion that there will
be 30% of finding your company guilty. The diagram is shown below:
the figure, the expected amount is $12.6 million. Referring to AASB 137, this should be the
case of contingent liability as the possible chance of historical events and
legal obligation are too remote to be strong or clear due to measurement of the
possible sum or inadequate reliable estimation. Therefore, Beachlife Ltd doesn’t
meet the present obligation with AASB criteria, possibly liability occurs.
There is a criteria that this issue to be disclosed as contingent liability whereas
possible of outflow is higher than a remote. For the time being, as shown in
above figure there is 30% of possibility in pleading guilty in compare to 70%
of not being guilty to its competitors which is too remote. So, the best
possible 60:40 ratio of 30% being guilty and 70% of being not guilty. Therefore,
Mr. Christopher Sampson should advice to Beachlife Ltd (Directors) to disclose
a foot note as contingent liability for the accounting reporting year end as uncertain
evidences or facts.
Looking through the second issues, I have
found some broad implication regarding the cost allocation and revenue with the
compliance with AASB 118 i.e. Revenue framework. As per the agreement between
Alpine Ltd and Beachlife Ltd, The equipment should be delivered on 22 Dec’ 2017
and revenue would be also known on the same day. On 31 Dec’ 2017 Alpine Ltd pays
off the sum of $180,000 for the equipment at the same time revenue would be
$165,000 for the time being and the fair value is $15,000 for the maintenance of
the equipment as deferred or unearned revenue.
As a result,
till this accounting reporting year end, $7500 would be the unearned revenue
and the rest amount of $7500 would be known as unearned revenue earned in the
next reporting period which would be the sum of $15,000. Alpine Ltd is also authorized to a refund of
15% of the amount paid if Beachlife Ltd does not maintain the equipment for the
year with satisfactory as required. Considerately, there is a possible of
paying $27,000 in a year if uncertain matter arise. I would recommend Beachlife
Ltd to form a provision account for a year in this reporting year. As per AASB
137 states that Provision recognition criteria can be relate with the issue due
to uncertainty and risk and also estimation of the amount is constantly foreseen.
per my understanding, journal entries of total provision would be created $27,000
which consist of same amount of $27,000 to deferred expense.
As per my recommendation,
the above given advice with the solution and links would be the best set-up for
your Beachlife Ltd Company. I have
also included the maintenance fee of $1250 in the provision journal entries
because the foreseen risk of $27,000 which I created as a deferred expense for
a year which allocate the maintenance expenses for 12 month which is also
allocated as a revenue and expenses in their financial year.
If you have any questions regarding to the above solutions or
advice, please don’t hesitate to contact us via phone r email.
Magenta and Associates