Analysis Of Provisions, Contingent Liabilities, Leases, Non-current Assets In Capral Limited (essay).

Overview of provisions recorded by Capral Limited

Discuss about the Lease Capitalisation On Financial Statement.

Looking at the financial statement of Capral Limited for the year ended 31^st December 2017 it is identified that the provision recorded by the company under current liabilities amounted to $ 12,638,000 as compared to $ 11,063,000 for the previous year. Further, the provision recorded by the company under non-current liabilities amounted to $ 49,52,000 as compared to $ 55,58,000 for the previous year. The details of provision recognized by the company are as follows –

On the other hand, regarding contingent liabilities it is disclosed in the notes through note no. 31 of the company that the bankers of the company have provided guarantee for rental obligations on the lease commitments, for using the infrastructure utilities and for the facilities associated with international trade. The amount of these guarantees amounted to $ 37, 82,684 for the year ended 2017 as compared to the $ 18,822,684 for the previous year.  

The company recognise its provisions when it has a present, constructive or legal obligation resulting from the past events and it is apparent that the company will be obliged to settle the claim and the amount of the claim can be measured reliably (Christensen, Nikolaev and Wittenberg?Moerman 2016). The recognized amount for the provision is best estimates for the consideration that is required for settling the present claim at the date of reporting. Further it takes into consideration the uncertainties and risks associated with the obligation. If the provision is measured through the estimation of the cash flows required for meeting the obligation the present value of the cash flows are considered as the carrying amount of the obligation. Further, if the amount required for meeting the provision is likely to be received from the 3^rd party the amount will be treated as an asset in the financial statement of the company (Hofmann and Lampe 2013). However, the reimbursement shall be expected to be received with certainty and the amount of receipt shall be able to be reliably measured.

On the other hand, the possible claims and claims that is not determinable in amount and that is created in the ordinary course of the business against the company are considered by the company as the contingent liability. However, the entity has made full provision for all the determinable and known claims (Wahlen, Baginski and Bradshaw 2014). Further, on the basis of legal the legal advices, the directors of the company are in the view that any of the resulting liability will not have an impact on the company’s financial position.

Contingent liabilities disclosed by Capral Limited

Payment guarantee made by the 3^rd party who is known as guarantor for providing any service or product in case of non-payment by the company will be considered as contingent guarantee. Here, the company have to pay some guarantee fee to the guarantor that is the bank in the given case (Bova 2016). The case shall be disclosed as the amount of lease obligation can be reliably estimated and the amount is $ 32,782,684. On the other hand, the amount shall not be disclosed if the amount of liability is to be provided by the bank in case of failure on the side of the company.

The company has commitments for the operating leases expenses amounted to $ 74,009,000 for the year ended 31^st December 2017. Out of the total operating expenses, $ 18,186,000 is categorized for within one year, $ 40,509,000 is categorized for more than 1 year and less than 5 years and $ 15,314,000 is considered under more than 5 year (Xu, Davidson and Cheong 2017). Operating leases of the company is related to the office and the plant premises that has lease term of 2 to 20 years and has an option to extend the lease for 3 to 10 years more. However, the company does not have the option for purchasing the leased assets after the lease term is over.

As per AASB 16 on leases the leases shall be classified as the finance lease while the terms of lease substantially transfers all the rewards and risks associated with the ownership of leased assets to lessee. All the other leases shall be categorized as operating lease. It has been identified from the financial statement of the company that the company categorizes its leases as the finance lease while the terms of lease substantially transfers all the rewards and risks associated with the ownership of leased assets to lessee. Further, all other leases are categorized as operating lease (Wong and Joshi 2015). Therefore, the company complies with the requirement of AASB 16 on leases while classifying its leases. Further, the company recognises the payments for operating lease as the expenses on straight line method over the term of lease, if any other method is not more systematic to represent the pattern of time regarding the economic benefits of consumed leased assets. The rental income generated from the operating lease is treated on straight line method over the lease term. The initial cost directly incurred for arranging and negotiating the leases are summed up with the leased asset’s carrying amount and it is recognised based on straight line.

Recognition of provisions by Capral Limited

If lease provisions are modified in te way that it has an impact on the original term of lease then modified agreement is required to be assessed again at the modification date for determining if any different classification is applicable to the lease. The test is carried out to analyse whether the changed terms will have any impact on the lease inception. If owing to reclassification the lease is reclassified then the revised agreement of the lease will be considered as the new agreement since the modification date and as such will be accounted for the cessation of old agreement. However, no retrospective restatement shall be made (Peach and West 2017).

One non-current asset that is considered for analysis from the financial statement of Capral Limited for the year ended 31^st December 2017 is Property, plant and equipment. The amount for plant, property and equipment of the company for the year ended 2017 was recorded at $ 42,010,000 as compared to $ 41,102,000 for the previous year. The details of property, plant and equipment is as follows –

The plant, property, equipment and leasehold improvements of the company is recognized at the faire values reduced by the value of accumulated depreciation and impairment losses, if any. The company determines the fair values based on the independent and periodic valuation by the external expert on valuation. The valuation is done on the basis of discounted cash flows or on the basis of net income capitalization, as appropriate to the company. Further, the company conducts periodic reviews in each 3 to 5 years (Joubert, Garvie and Parle 2017). The company recognizes the fair value in the annual report of the company and the amount is reviewed at closing of each period of reporting for ensuring that carrying value of the asset materially is not different as compared to the fair values. In case of deferral of settlement for purchase consideration the cost of the asset is determined through discounting the accounts payable to the present value at the acquisition date. The depreciation on leasehold improvements is provided based on the lease period or the expected useful life, whichever is lower (Zakaria et al. 2014). The depreciation is provided on straight line approach. Further, the method of depreciation, residual value and expected useful life are reassessed at the closing of each closing period for annual report. Impact of changes, if any, is also recognised on the prospective basis.

However, an alternative method that is the cost model is adopted for valuing the property, plant and equipment in case of inflationary situation. Under such situation the asset is initially measured at cost rather than valuing it at fair values and the book values of the asset are significantly lower as compared to the replacement value (McGrattan and Prescott 2014).

Therefore, it is identified from the financial statement and the associated disclosures of the company that the company is complying with all the requirements of AASB with regard to the recognition and treatment of provisions and contingencies, leases and non-current assets.

Reference

Bova, M.E., 2016. The Fiscal Costs of Contingent Liabilities. International Monetary Fund.

Christensen, H.B., Nikolaev, V.V. and WITTENBERG?MOERMAN, R.E.G.I.N.A., 2016. accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), pp.397-435.

Hofmann, E. and Lampe, K., 2013. Financial statement analysis of logistics service providers: ways of enhancing performance. International Journal of Physical Distribution & Logistics Management, 43(4), pp.321-342.

Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The Journal of New Business Ideas & Trends, 15(2), pp.1-11.

Lubbe, I., Modack, G. and Watson, A., 2014. Financial accounting GAAP principles. OUP Catalogue.

McGrattan, E.R. and Prescott, E.C., 2014. A reassessment of real business cycle theory. American Economic Review, 104(5), pp.177-82.

Peach, K. and West, C.S., 2017. Invitation to comment on ED 277 Disclosure Requirements for Tier 2 Entities.

Wahlen, J., Baginski, S. and Bradshaw, M., 2014. Financial reporting, financial statement analysis and valuation. Nelson Education.

Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), p.27.

Xu, W., Davidson, R.A. and Cheong, C.S., 2017. Converting financial statements: operating to capitalised leases. Pacific Accounting Review, 29(1), pp.34-54.

Zakaria, A., Edwards, D., Holt, G.D. and Ramachandran, V., 2014. A Review of Property, Plant and Equipment Asset Revaluation Decision Making in Indonesia: Development of a Conceptual Model. Mindanao Journal of Science and Technology, 12(2014), pp.109-128.