Phonebiz Ltd is a telecommunications company that is listed on the Australian Securities Exchange. On 28 June 20X9 the Federal Court of Australia found Phonebiz Ltd to be guilty of making false or misleading representations to customers in 20X6 and 20X7 in relation to its third-party billing service known as “Direct Billing” (DB). The Court held, by consent, that Phonebiz Ltd misled customers when it charged them for digital content, such as games and ringtones, which they unknowingly purchased. They found that Phonebiz Ltd did not adequately inform customers that it had set the direct billing service as a default on their mobile accounts. If customers accessed content through this service, even unintentionally, they were billed directly by Phonebiz Ltd.

As at 30 June 20X9 the Court had not determined the amount that Phonebiz Ltd would be required to pay for penalties or fines as a result of the findings. At that date, there was no precedent that could provide an adequate measure of the expected amount.

Phonebiz Ltd has admitted that a significant number of customers may have been affected as a result of mobile phone contracts they entered into with the direct billing service attached during 20X6 and 20X7. The company will offer refunds to those customers to prevent further damage to its reputation. As at 30 June 20X9 the company was unable to estimate the total amount it would be expected to pay to those customers.

Required

Explain how this event would be accounted for in the financial statements of Phonebiz Ltd for the year ended 30 June 20X9. Your answer must clearly state your position, provide the evidence that you have used to determine that position and support your answer with paragraph references from one or more relevant Australian Accounting Standards.

Answer rating: 100% (QA)

Technical literature AASB has issued AASB 137 dealing with the Provisions Contingent Liabilities and Contingent Assets Standard defines contingent liability as a a possible obligation that arises from ... View the full answer