Question

Explain each of the following terms that represent information disclosed in the footnotes and give an example.

a) Contingencies

b) Accounting policies and significant risk

c) Contractual situations

d) Fair values

Answer 1

A. Contingencies

Contingencies are normally those future events which can effect an entity but the quantification of the effect cannot be predicted with certainity. In simple terms, continegencies are future uncertain events which will effect an entity

eg: Guarantees, warranties and any litigation

B. Accounting policies and Significant risk

Accounting policies are the specific accounting principles, methods and procedures which are being used by the company's management in prepration of its financial statements.

eg: Depreciation Methods - SLM or WDV

Valuation of investments - Historical or current

Significant Risk is that risk which is critical to the entity, generally these are those items which will be considered special and specific by the auditors while auditing financial statements.

eg: Sudden increase in production costs, Loss of valued customers, increase in competition

C. Contractual Situations

Means the contracts which are entered by the company in order to do an perform any task as per the requirement of the customer, if a company entered into any contracts, there will be obligation on the company to fulfill the same.

eg: Construction of any immovable properties

D. Fair values

Fair values are those values of the assets and liabilities which are measures at the prevailing market price/Value. means the value at which the asset could be sold or liability can be settled. This is agaist the concept of historical value.

Eg: Valuation of investments at current prevailing price and non recognition of goodwill as there wont be any fairvalue for goodwill

All the above terms, if required and according to the policies and priciples of the company needs to be disclosed and quantified in the foot notes of the financial statements.

Please let me know if you require any explanation further. Thanks in advance.