Reference no: EM132504647

Point 1: Phonebiz Ltd is a telecommunications company that is listed on the Australian Securities Exchange. In January 20X9, Phonebiz Ltd was accused of making false or misleading representations to customers in relation to its third-party billing service known as "Direct Billing" (DB). Legal proceedings have commenced in relation to these accusations and at 30 June 20X9 the case is ongoing.

Point 2: Customers have claimed that Phonebiz Ltd misled them when it charged them for digital content, such as games and ringtones, which they unknowingly purchased. It was alleged that Phonebiz Ltd did not adequately inform customers that it had set the direct billing service as a default on their mobile phone accounts. If customers accessed content through this service, even unintentionally, they were billed directly by Phonebiz Ltd. It was alleged that more than 100,000 customers may have been affected as a result of mobile phone contracts entered into with the direct billing service attached during the years 20X7 and 20X8.

Point 3: Phonebiz Ltd has accepted full responsibility for its actions and has committed to offer refunds to any customers that have been affected to prevent further damage to its reputation. Experts have estimated that if Phonebiz Ltd is found guilty of the allegations, the company could be liable for penalties and refunds totalling approximately $50 million.

Required

Question 1: Explain how this event would be accounted for in the financial statements of Phonebiz Ltd for the year ended 30 June 20X9. In your answer you must clearly state your position, provide the evidence that you have used to determine that position and support your answer with paragraph references from one or more relevant Australian Accounting Standards.