ACT204 Financial Accounting-International Litigation Partners

Read the following adaptation of an article entitled ‘CBA in payout on “toxic” products’ by Leo Shanahan that appeared
in The Australian on 4 April 2015.In 2012 a claim was lodged in the Federal Court against the Commonwealth Bank by Gloucester Council and an investment company, Clurname, alleging that CBA had breached its duty of care and engaged in misleading and deceptive conduct in selling them ‘toxic’ investments, ignoring their request for conservative investments. Eventually around 35 investors, who had been sold $140 million worth of AAA-rated collateralised debt obligations (CDOs), participated in the class action.

CBA settled with the investors for $50 million, including legal fees, and agreed to pay $1.5 million to International Litigation Partners, funder of the class action.The bank refused to comment on the settlement, saying the court still had to approve it, although CBA had previously said the investor’s claim had no merit. In the course of the case it had been revealed that CBA had settled with at least 14 other CDO investors.

CBA had earlier been faced with the fallout from the frauds perpetrated by some of its financial planners, which led to
public apologies and expensive settlements.
REQUIRED

On the basis of the brief information provided, consider how, if you were the chief accountant at the Commonwealth Bank,the case would be disclosed within the annual report of CBA. What factors would you consider in determining the form the disclosures should take, and in which years the disclosures would be made.

Hopeful Ltd leased a portable sound recording studio from Lessor Ltd. essor has no material initial direct costs.Hopeful Ltd does not plan to acquire the portable studio at the end of the lease because it expects that, by then, it will need a larger studio. The terms of the lease are as follows:
• Date of entering lease: 1 July 2019.
• Duration of lease: four years.
• Life of leased asset: five years.
• Lease payments: $50 000 at the beginning of each year.
• First lease payment: 1 July 2019.
• Lease expires: 1 July 2023.
• Interest rate implicit in the lease: 8 per cent.
• Guaranteed residual: $40 000.

REQUIRED
1. Determine the fair value of the portable sound recording studio at 1 July 2019.
2. Prepare a schedule for the lease payments incorporating accrued interest expense.
3. Prepare the journal entries to account for the lease in the books of Hopeful Ltd at 1 July 2019, 30 June 2020 and
1 July 2020.
4. At the termination of the lease, Hopeful Ltd returns the portable sound recording studio to Lessor Ltd, but its fair
value at that time is $25 000. What must Hopeful Ltd do to comply with the terms of the lease Prepare the journal
entries in the books of Hopeful Ltd for return of the asset to Lessor Ltd and the settlement of all obligations under
the lease on 1 July 2023.

In the annual report the case will be disclosed under "Director's Report" column as below:

During the year, a case was lodged against the bank by Gloucester Council and an investment company, Clurname alleging that the bank was engaged in selling the toxic investments. The case is still pending with the Federal court to decide. Further, a class action was conducted against the bank, in which 35 investors had participated. Considering the class action results and to clam the investors the bank has paid $50 million to the investors and $1.5 million to International Litigation Partners, funder of the class action. However, this settlement is still pending with the court for approval.

Moreover, it has came to notice that certain news are being gossiped by various news papers regarding the credibility of the bank and previous fallouts. The management wants to clarify that these news are baseless and the investors should not be fearful regarding their hard earned money which they have invested with us. The case is being invested by the court and further by an internal team of the bank and the management wants to assure you that the case will be investigated by every aspects and the culprits engaged in issuing the toxic investments, if any will be punished hardly.

Financial Disclosures

Further, the bank considering the density of the case, has created contingent liability to the extent bank seems the loss or settlement claims to be paid in the future. The same is shown in the foot notes to the statement of financial position.

Factors to be considered for determining the form of disclosures:

1. The facts of the case
2. Position by the directors or management
3. Current measures undertaken
4. Financial impact on the company/ bank
5. Future actions to be taken for mitigating the situation
6. The financial disclosure

Year of disclosure - The disclosure should be made in the year of starting of the case i.e. 2012 and till the settlement of the case.

1. Calculation of the fair value of the portable sound recording studio at 1 July 2019

2. Schedule for the lease payments incorporating accrued interest expense

Hopeful Ltd. must pay difference $15,000 (40,000 - 25,000) between fair value of studio and guaranteed residual value.

1. Calculation of Alexandra Bay’s current obligation for long-service leave

Alexandra Bay's current obligation for long service is $16,314/-.

2. The journal entry to record Alexandra Bay’s long-service leave expense

Journal Entries

Treatment adopted:

As per the generally adopted accounting norms, the inventory is recorded in the books when the title of goods is passed. As per the contract in the given case, the title of goods is passed on 30 April, 2018, i.e. on the date of delivery and hence, the goods are recorded as inventory on 30 April, 2018 at the prevailing exchange rate. Further, AASB 121, “The effect of changes in foreign exchange rates”, requires to fair value the pending liabilities and assets at the reporting date, i.e. 30 June, 2018 and respective gain or loss to be transferred to P&L. The same has been followed. Further, the liabilities are paid off at the payment dates and respective gain or loss due to foreign exchange fluctuations is recorded.

Journal Entries

Treatment adopted:

In the given case, the Equipment is recorded on the delivery date i.e. on 31 May, 2018 with subsequent valuation of pending liabilities, i.e. accounts payable on closing date i.e. on 30 June, 2018, as required by AASB 121, “Effects of changes in Foreign Exchange rates”.

The accounts payable are settled on 31 July, 2018 and the difference due to foreign exchange fluctuation is recorded in P&L.

1. Journal Entries

Physical Position using spot rat

Treatment adopted:

In the given case, the loan is recorded using spot rate on the date of transaction, i.e. on the date of taking loan. Further, as required by AASB 121, the loan is marked to market to carry the loan at fair value on the reporting date. The interest upto 30 June, 2018 has been accrued and the exchange difference between the rate on the transaction date and on the reporting date has been transferred to the P&L.

The hedging portion of the loan has been recorded at the forward rate on the reporting date and the corresponding amount is transferred to the Hedge Reserve account and from the Hedge reserve account to the P&L.

1. Journal Entries

Physical Position using spot rate 

Treatment adopted:

The inventory is recorded on the date of delivery (as title and possession of the goods is passed on the date of delivery) using the spot rate prevailing on the transaction date. Then, the amount payable to vendor, i.e. accounts payable is marked to market on the reporting date and finally settled on 31^st August, 2018 by paying off the liability at the prevailing spot rate and differences arising due to foreign exchange fluctuations are recorded in P&L.

The treatment of hedging portion is that the contract is valued on the reporting date i.e. 30^th June, 2018 at the forward rates prevailing on 30^th June and corresponding amount is transferred to the P&L through Hedging Reserve.