QUESTION 1:

Magnolia Ltd is involved in a legal dispute with the ATO regarding a tax credit of $1,000,000 they had received in a previous financial year. When the financial statements were prepared as at 30 June 2022, Magnolias lawyers were of the opinion the ATO would not win the court case. However, on 1 August, the ATO won the court case on a technicality and the judge awarded the ATO $1,000,000 plus costs of $200,000. Magnolia intends to dispute this ruling, however, the outcome of the second court case will not be known for many months. The financial statements are authorised by the directors on 31 August 2022.

REQUIRED:

1. What is the difference between a provision and a contingent liability? Cite the applicable paragraphs in AASB 137.

2. How would Magnolia present the above situation in its initial 30 June 2022 financial statements? Discuss your decision process and conclusion, referencing applicable accounting standards.

3. How would Magnolia modify its 30 June 2022 financial statements (if at all) following the loss of the court case on 1 August. Discuss your decision process and conclusion, referencing applicable accounting standards.