Question

Provisions, Contingent Liabilities and Contingent Assets (NZ IAS 37)

Tom Goodly Ltd guarantees the bank overdraft of Pete Smith Ltd during 2018. Tom Goodly Ltd’s reporting period ends on 30 June each year. At the time of providing the guarantee, Pete Smith Ltd was in a sound financial position. During late 2019, due to the outbreak of the COVID-19 pandemic, international trading conditions deteriorated to such an extent that Pete Smith Ltd incurred substantial losses. Finally, on 25 July 2020, Pete Smith Ltd was forced to file for protection from its creditors.

Required:

Explain how Tom Goodly Ltd would report the guarantee provided to Pete Smith Ltd in its financial statements ending

i) 30 June 2019   ii) 30 June 2020

Answer 1

Guarantee is a contingent liability and contingent liability shown in notes of account only.

Tom Goodly Ltd would report the guarantee provided to Pete Smith Ltd in its financial statements ending

i) 30 June 2019 :

Due to the outbreak of the COVID-19 pandemic, international trading conditions deteriorated to such an extent that Pete Smith Ltd incurred substantial losses. Since it happened during late 2019, Tom Goodly should report the gaurantee as Contingent liability under notes to accounts only.  

ii) 30 June 2020 :

Here the contingentliability of guarantee becomes payable on demand, therefore Tom Goodly should reclassify the continget liability and make a provision for such liability and should also dislose the fact about Pete Smith ltd's financial position in its financial statements.