Thank you for your email on 13th November. As agreed I am writing a letter to you regarding the accounting issues mentioned in your email.
(1) You mentioned that in October, you company had a lawsuit with a strong competitor on the issue of patent infringement. The claim for patent infringement is $ 87 million. The hearing of the dispute was not scheduled until July 2018. Beachlife Ltd.’s legal counsel believes Beachlife Ltd has a 30% chance of being found guilty. Beachlife Ltd has a 60% chance of paying $ 50 million to the plaintiff, and 40% of the opportunity to receive $ 30 million in compensation if convicted.
The Australian Accounting Standards Board established Accounting Standard AASB 137 Preparation, Contingent Liabilities and Contingent Assets under section 334 of the Companies Act 2001. The reserve should be recognized if: (a) the entity has an existing obligation (statutory or constructive) in the past due to: (b) the fulfillment of that obligation may require an outflow of resources that reflects economic benefits; (c) A reliable estimate of the amount that can be spent on this obligation. If you do not meet these conditions, it is not recognized. Contingent liabilities are: a) a possible obligation that existed in the past and whose existence has only been confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or b) The current obligation that is unidentified but not confirmed (i.e., the unrecognized current obligation) is as follows: i) it is not likely to result in the outflow of economic benefits out of resources if the obligation is discharged; or ii) the amount of such obligation cannot be measured with sufficient reliability. Depending on the development of future events, the possible future obligations may become the present ones.
First, pending competitor patent infringement litigation is a lawsuit that does not begin until July 2018, meaning your company has a statutory obligation as a result of past events, but there is no evidence that the current obligation exists during the reporting period. Second, the legal adviser also mentioned that your company is 30% more likely to be found guilty. If it was found guilty, your company will have to pay $ 50 million, or 40%, for$ 30 million compensation. The company did not pay the plaintiff 70% chance of compensation. Explain the outflow of economic benefits is unlikely to resolve the obligation. Since the case does not meet the above three provisions, your company does not need to be included in the financial statements. Although you do not need to include it in the financial statements, depending on the development of future events, the possible obligations may become the present obligation. Therefore, contingent liabilities should be disclosed in the notes to the financial statements. Intangible assets should be included into the balance sheet for the necessary confirmation and amortization. In this case, the intangible asset is worth recognition and has a date of US $ 87 million as of June 30, 2018, using the “Valuation of Directors” as a reference. This means that the company has changed its accounting policies and confirmed the cost of internally developed intangible assets in order to pay as of June 30, 2018. In addition, the useful life of intangible assets is so amortized during this period. The amount recognized for amortization is estimated at cost ($ 87 million) less residual value (if applicable).
(2) You have mentioned that your company recently signed an agreement to sell equipment to Alpine Ltd on December 12, 2017 for a consideration of USD180, 000. Beachlife Ltd will deliver the equipment on December 22, 2017 and will expire on December 31, 2017. Beachlife Ltd must maintain this equipment for the first 12 months from the date of delivery. If Beachlife Ltd does not satisfactorily maintain the equipment as required, Alpine Ltd reserves the right to refund 15% of the amount paid. Beachlife Ltd estimates that the fair value of maintenance equipment for the year was $ 15,000. The board cannot agree on proper accounting for this sales agreement.
An impairment of an asset indicates that the asset is impaired when the carrying amount exceeds its recoverable amount and requires that the carrying amount of the asset be reduced to the recoverable amount if and only if the recoverable amount of the asset is less than its carrying amount. This reduction is called impairment loss. If there are indications that there is any indication of impairment, the entity should estimate the recoverable amount of the asset. The recoverable amount is recorded as the higher of the fair value less costs to sell and the value in use of the asset or cash-generating unit. If any sum exceeds the book value of the asset, the asset will not be impaired. Therefore, management should not recognize impairment as the recoverable amount (the higher of value in use and fair value less costs to sell) than the carrying amount. If management chooses to sell the asset instead of using it for management, management can recover the asset’s carrying value. Therefore, there will not be any impairment in this case. However, you must ensure that the fair value provided in the independent assessment does refer to the “fair value less costs to sell” parties less available-for-sale costs that are available to an asset or cash-generating unit, at arm’s length between knowledge and willing.
The best accounting for this agreement / transaction is to consider the equipment purchase price and maintenance costs. The board should agree to record the purchase of the equipment for $ 90,000 at the time of delivery of the equipment. In order to deal with who will meet the uncertainty of repair, and due to the terms of the agreement, Beach Life Co. will refund $ 7,500 for equipment maintenance costs if it does not maintain the equipment. This is because repairs are inevitable, and even then they will still recover the amount ($ 7,500).
Thank you for your time. If there is any question regarding the above advice or other accounting issue on financial statements reporting, please do not hesitate to contact me.