2. Contract Law for Professional Accountant- Events and Conditions

 Let us try to further our quest for making contract law useable for accounting and auditing. Auditing standards commonly use the term events and conditions to be audited. Except for balances c/f all accounting can be divided into that of events and conditions. 

There is nothing as such accounting event, rather there are economic events which the accounting try to record and later classify and present according to financial reporting standards. For our purpose of accounting in an entity level, it is best to use microeconomic events to be event and further classify macroeconomic events as external conditions and contractual conditions as internal conditions which need to be accounted for.

Under contract law, we are concerned about microeconomic event from contracts and internal conditions only. 

These microeconomic events are purely exchange events which can be further divided into internal exchange and external exchange. But in pure contractual nexus vision of the organization, there is no such internal exchange possible except for exchange with subsidiaries. Hence, we are concerned with external exchanges only.

These external exchanges are facilitated in our form of state through private property law and contract law. The division of state property by ownership to individual citizens creates the concept of wealth at individual level and that of contract law allows individuals to maximize their utility and this behavior is  regulated by the state without interfering unless otherwise sought by parties affected. 

Now we are ready to use such events and conditions for accounting purpose. Contract is the manifestation of intention of parties. These intention need not to be exactly how they desired to obtain within organization rather it is market phenomenon. But the broad substance of these market phenomenon are captured by financial reporting standards too. For example, for lessor the same asset on lease can be operating lease or finance lease and/or sale transaction, sales and leaseback transaction, which is determined by the objective analysis of the contract in light of financial reporting standards. 

Here is the tricky part, contract shows what they want from the other party of the contract, i.e. the intention with another party and financial reporting standards capture what exactly entity intent to do with the manifestation of the contract. 

It will be easier to see it in the light of assets and liabilities. Among liabilities except those that are driven by conditions are covered by provision (we may not be able to discuss here), substance of all other liabilities have the same intention that they shows in the contract. Accountant will not be troubled by those liabilities part as long as they can gather all such contracts at their disposal.

It is in the part of Assets that external intention and internal intention differ. For those contract where a regular interaction with external party is need such as for leases, insurance contracts, financial assets etc. there also these intentions coincides. 

Assets which are completely detached from other party of contract such as in the case of raw materials of Inventories, PPEs, Investment Properties, etc. they are often entered into with different intentions in contract and in use. there Accountants should be using internal intention for classification under relevant financial reporting standards. 

Internal conditions of contract are often associated with liabilities and external conditions with that of Assets. I am of view that I will try to explore these conditions in more detail with time.