Answer Happy

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:
Method one: Do not include contingent assets and contingent
liabilities in the financial statements. Do not provide information
about contingent assets or contingent liabilities in the notes to
the financial statements.
Method two: Do not include contingent assets and contingent
liabilities in the financial statements. However, disclose details
of the contingent assets and contingent liabilities in the notes to
the financial statements.
Method three: Fully disclose contingent assets and contingent
liabilities, and any gains or losses related to them, in the
financial statements.
a) If S&G were to adopt method three (3 marks total):
i. Provide the journal entries (hypothetical in this case)
required to recognise the contingent assets and contingent
liabilities.
ii. What will the income statement and balance sheet look like
after these adjustments? Consider contingent assets and contingent
liabilities separately, by providing two scenarios: one where only
contingent assets are recognised and one where only contingent
liabilities are recognised. Do not offset contingent assets and
liabilities.
iii. Would adopting method three result in a more credible
presentation of S&G’s financial performance and financial
position?