Sonia is the Junior Accountant at East Ltd and she has recently completed the first draft of the year-end financial reports. The following financial information is extracted from the financial statements for the year ended 30 June 2022:

	Notes	$
Non-current assets
Contingent assets	1	5,000,000
Non-current liabilities
Provision for staff training	2	1,000,000
Contingent liabilities	3	250,000

All the items recognised above are considered material in East Ltd's context.

Notes:

1. The contingent asset is in relation to a legal case which East Ltd has taken against Middle Ltd, one of its major suppliers. The materials supplied by Middle Ltd were faulty and have caused major disruptions in the production lines. These have then caused low production output, customer grievances, loss of customer loyalty and decrease in staff morale. The directors are confident that they will win over the case and demanded compensation of that amount. The directors initiated the case in May 2022 and are still waiting for the court order to hear the case. Sonia thinks that once the company wins the case, it will bring in huge cash flow that should be reflected in the current reports.
2. The company has recently added a new production line to one of its factories. However, as the production process is new and there is no internal expertise, the company has had to hire external specialists to train all of its production workers which has been planned to happen during August 2022. Given the materiality of this expenditure, Sonia thinks it is best to set aside a provision to account for it now.
3. The contingent liabilities are related to warranties on products offered to customers. East Ltd has a business practice to return, refund or replace products at fault within 3 months of purchase. Sonia comments that since this business practice has not been published anywhere, and that 95% of its customers are happy with their products anyway, it will only be recognised as contingent liabilities.

Sonia has presented her draft financial statements to you, the Senior Accountant, for review and comments.

Required:

You should answer all the following questions by making references to AASB 137, whenever relevant.

In relation to the contingent assets:

1. Should the legal case be recognised as contingent asset? Why or why not? (3 marks)
2. How should the legal case be treated in the financial statements for the year ended 30 June 2022 in East Ltd's books? Justify your answers. (2 marks)

In relation to the provision for staff training:

1. Explain if the estimated staff training costs can be recognised as a provision. Why or why not? (3 marks)
2. How should the future staff training be treated in the financial statements for the year ended 30 June 2022 or 2023? Justify your answers. (2 marks)

In relation to the contingent liabilities:

1. Should the warranties provided to customers be recognised as contingent liabilities? Why or why not? (3 marks)
2. How should the warranties be recognised in the financial statements for the year ended 30 June 2022? Justify your answers. (2 marks)

Answer rating: 100% (QA)

In relation to the contingent assets Should the legal case be recognized as a contingent asset Why or why not 3 marks No the legal case should not be recognized as a contingent asset as per AASB 137 C... View the full answer