In $2007,$ Slater & Gordon $($S&G$)$ became the world$$s first law firm listed on a stock exchange. S&G is headquartered in Melbourne, where William Slater and Hugh Gordon founded it in $1935.$ Progressively, S&G has become one of the industry$$s most recognised brands, developing a reputation for defending the underdog and being regarded as $$anti$-$globalist, anti$-$capitalist, pro$-$worker, pro$-$environment and pro$-$indigenous peoples$.$

Since listing, net fee revenue grew by over $10\%$ per year and the share price rose from a $$1$ to $$8\mathrm{.}07,$ prior to crashing in $2015.$ This collapse started from the $2014$ acquisition of Quindell PLC$,$ a UK law firm. The acquisition cost GBP$637$million $($about AUD$1\mathrm{.}3$billion$),$ funded by an AUD$890$million share issue and a AUD$375$million bank loan. Approximately AUD$1$billion of the acquisition price was recognised as goodwill. By the time S&G released its $2016$ annual report, it had recorded about AUD$787$million of $$badwill$($impairment losses on goodwill$).$

Your are required to research the Quindell acquisition and answer the following two questions:

Question $1$

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.

You must answer the following questions $($see next page$)$:

a$)$ If S&G were to adopt method one, would it affect the credibility of the financial statements? Provide an analysis to justify your answer $(3$ marks$).$

b$)$ If S&G were to adopt method two, why would they prefer not to disclose contingent assets and liabilities in the financial statements? Provide at least two reasons to support your answer $(3$ marks$).$

c$)$ If S&G were to adopt method three:

i$.$ Provide the journal entries $($hypothetical in this case$)$ required to recognise the contingent assets and contingent liabilities. $(2$ marks$)$

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. $(5$ marks$)$ Use a table with current figures $($ as per FS and figures after adopting method $3)$ Present $2$ tables and compare

iii. Would adopting method three result in a more credible presentation of S&G$$s financial performance and financial position? $(3$ marks$)$ Back with std

iv$.$ Under what circumstances would contingent assets and contingent liabilities be instead considered provisions? $(2$ marks$)$

d$)$ Finally, review the next two annual reports after the annual report you selected for this question. Did S&G follow up these contingent assets and contingent liabilities in the next one or two years? If yes, what changes did they make to the contingent assets and contingent liabilities, if any? $(6$ marks total. Note: this question is based on S&G$$s actual published annual reports. It is not connected to the above questions about adopting methods $1,2$ or $3.)$