Select an annual report of S&G where the company disclosed contingent assets and contingent liabilities. Consider the following three alternatives and the three possible ways to account for them. 

i. Ignore the contingent assets and liabilities on the financial statements, and provide no information on these accounts. Would this option distort the credibility of the financial statements? Provide your analysis to justify your answer. 

ii. Ignore the contingent assets and liabilities on the financial statements, but disclose these details in the notes to the financial statements. Why would S&G prefer not to disclose contingent assets and liabilities on the financial statements? You need to provide a minimum of two reasons. 

iii. Recognise the amount of gain or losses on the income statement and balance sheet, and disclose the issues in the notes to the financial statements. Provide the journal entries (hypothetical, in this case) for the recognition of the contingent assets and contingent liabilities. What will the income statement and balance sheet look like after these adjustments (consider contingent assets and contingent liabilities separately?, (i.e. provide two scenarios, one taking account of just contingent assets and one taking account of just contingent liabilities. Do not offset contingent assets with contingent liabilities.) Would this option be more credible in presentation of the company’s financial performance and financial position? In what situation would these contingent assets and contingent liabilities would be considered as provisions?Finally, did the company follow up with these contingent assets and contingent liabilities in the following year or years (this will require you to review annual reports in the following two years)? If yes, what changes did the company make?

Answer rating: 100% (QA)

i Ignore the contingent assets and liabilities on the financial statements and provide no information on these accounts Would this option distort the ... View the full answer