Provisions and Contingencies

Discuss about the Operating Lease Accounting And The Market.

Analysis of the financial report shall be made in the proper and fair manner. It is because if the analysis goes wrong in any manner then the decision taken thereon on that basis will be futile and will further affect the going concern nature of the company. Therefore, the analysis of the financial statements shall be done in the proper and due care. Through this essay, the financial report of the company has been analysed with respect to the areas given in the requirement. The company that has been provided for the purpose of the preparation of the essay is Grain Corp Limited. It is the company which is public limited and is registered in the Australian Stock exchange. It deals with the grain and its related commodities and the products. It also deals in the logistics and the marketing of these products. The essay has covered the majorly four areas. First aspect is related to the provisions and contingencies, its recognition and measurement. Second aspect is related to the leased items, its necessary disclosure and the reclassification. Third aspect deals with the noncurrent asset, its valuation and presentation and the last aspect deals with the assessment of the qualitative characteristics of the financial statements of the company. With these considerations and aspects the essay has been framed and ended with the concluding paragraph.

The company has recorded the provisions of the $60.3 million for the financial year ending 2017 under the head of the current liabilities and under the head of the noncurrent liabilities amount of $11.80 million has been recorded. The detailed note has been mentioned in the 3.6 number of the notes to the accounts of the financial statements.  

The company has recorded the contingent liabilities in respect of the following:

• The company has the self insurance for workers compensation in NSW. As required by the law, bank guarantee is required to be executed in favor of the Authority of Work cover of NSW and accordingly 0.6 million dollars has been executed which represents the contingent liability for actuarial valuation which is arising from the past insurance methods.
• In the normal course of the business, the company enters into the financial guarantees and accordingly 12.6 million dollar has been recorded.
• In respect of the joint ventures entered into by the company, the contingent liability in respect of the capital commitments and lease commitments has been recorded as $2.2 million and $1.4 million respectively (Grain Corp Limited, 2017).

The accounting policy that the company has adopted for the purpose of the recognition of the provision provides the following:

• The company group shall have the liability in the current which shall be due to the result of the earlier event
• There shall be the proper outflow of resources and from which the liability so determined will be settled and
• The estimate of the amount so recognized shall be made in reliable terms (AASB, 137, 2017).

There are four major heads in the provision head as per note number 3.6 of the annual report of the company. These have been detailed below with respect to the measurement thereon.   

• Customer Claims – The company has made the provision is respect of the grain losses or damages if any occurred in the normal course of business and that grains are owned by the customers. The measurement is purely on the basis of the judgment and estimation and that too with the past experience and results.
• Onerous Contracts – The provision is equal to the costs which cannot be avoided in case the cost of meeting the requirements of the contract exceeds the benefit that will arise from the contract.
• Employee Benefits – This is the most important expect in the provision head is the employee benefits and includes the amount which the company is liable to pay to their employees on account of the sick leave, annual leave and other similar leaves. For calculation of the employee benefits the present values of the payments which is expected to be made in the future and that too till the date of the end of the financial reporting period and hence the same has been created.     
• Other provisions – It comprises of the compensation of the worker and restoration and the restructuring work (Grain Corp Limited, 2017).

The contingency has been recognized on the basis of the likelihood of the events which will be happened in the near future year to come. The contingencies are recorded and mentioned in the notes to accounts of the financial statements of the company and in case the liability gets confirmed on the basis of the happening of that uncertain event then the corresponding liability will be disclosed in the books of accounts of the company. If in the given case the joint venture liability arises and was not able to pay in future then the group has to first make the liability in the books of accounts and then the liability will be settled.

Leases

In the normal course of the business, the group has entered into the financial guarantee and which amounts to $12.6 million.

The contingent liability is disclosed when there is the likelihood of the event that it will happen in the future. But in respect of this guarantees this is not the case. It is because the directors of the company will not in any manner believe that these financial guarantees so disclosed as contingent liability will be invoked on any manner in the future and hence the requirement of mentioning the same in the annual report of the company does not arises. Therefore, the same shall not be recorded in the financial report of the company. 

At first the items of leases are mentioned under the head of the borrowings as note number 2.1 of the financial statements of the company. The amount of 0.2 million dollars and 8.8 million dollar has been disclosed under the head of current and noncurrent borrowings (Grain Corp Limited, 2017).

The company has disclosed the lease which is non cancellable operating one amounting to $286.60 million. In case of the operating lease for which the company has charged the payments to the statement of the profit and loss account, the company has recognized the right of use the asset and the corresponding liability has been created equivalent to the amount of the principal.

The company has disclosed the amount of $79 millions as the operating leases in the financial report of the company. 

Although the new accounting standard has come on the leases in which no division is required to be made as finance and operating, but the same will be applicable on the company from first of October 2019 and therefore the management has not presented the financial impact on the same in the financial statements of the company (Ma, 2011).

The company has presented the division on the basis of the nature of the item as operating and finance lease.

In case any item is reclassified from operating to financial lease and from financing lease to operating one. In the given financial statements of the company the lease property has been taken (Ely, 2015). The land and building will first be classified as the operating lease due to its indefinite economic life and thereafter can be separately classified with land as the operating lease and the building as the financial lease where the lease payments will be amortized in accordance with the definite period.

The noncurrent asset that has been selected for the purpose of the essay is the property plant and equipment. It includes land, buildings and structures, leasehold improvements, plant and equipment and the capital work in progress amounting to $1500.50 million.

The carrying value of the asset has been measured at the cost less the amount of the accumulated depreciation if any and the amount of accumulated impairment losses. The depreciation has been charged on the useful life and the impairment has been charged on the presence of the indicators (AASB, 2010).

The qualitative characteristic of the financial statement is that it shall be relevant for the users of the financial statements. On valuation of the property plant and equipment it has been checked that the useful life of the assets have not been disclosed in the separate manner and accordingly either the useful life of the asset shall be disclosed separately for each asset or the written down value method shall be used. It will enhance the relevancy of the financial statements of the company.  

Conclusion

The financial statements shall be analysed keeping in view all the requirements of the users of the financial statements of the company. The details of the company – Grain Corp Limited has been analysed with the respect to the recognition, valuation and measurement of major four heads namely provisions and contingencies, leases, noncurrent asset and qualitative feature of the financial statements of the company. The report has detailed each and every aspect and to conclude the report the company shall make all endeavors to prepare the financial statements and the annual report of the company in the true and fair manner with the necessary compliance of the accounting standards and the relevant statutes as applicable to the company.

References

AASB, (2010),”AASB 116 Property, Plant and Equipments” available from https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf accessed on 19-05-2018

AASB 137, (2017), “Provisions, Contingent liabilities and Contingent Assets” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf  accessed on  19-05-2018

Ely, K.M., (2015), “Operating lease accounting and the market’s assessment of equity risk”. Journal of accounting Research, pp.397-415

Ma W, (2011), “Impact on Financial Statements of New accounting model for leases” available at https://digitalcommons.uconn.edu/cgi/viewcontent.cgi?article=1194&context=srhonors_theses accessed on 19-05-2018

Grain Corp Limited, (2017), “ Annual report – 2017” available on https://www.graincorp.com.au/  accessed on 19-05-2018