Using IAS 37, critically evaluate whether ABC Ltd.’s recognition of the R500,000 provision for the legal dispute is appropriate. Discuss the conditions that must be met for a provision to be recognized and apply them to this case. State and apply the definitions
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It is recognized when: - An entity has a present obligation (legal or constructive) as a result of a past event. - It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. - A reliable estimate can be made Show more…
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Abebio Limited is a listed company with a year-end of 31 December 2019. A director of the company has a number of questions relating to the application of International Financial Reporting Standards (IFRS Standards) in its financial statements for the year ended 31 December 2019. The questions appear in notes 1-3. Note 1 - Pending legal cases: At a recent board meeting, we discussed legal cases which customers A and B are bringing against Abebio in respect of the supply of products which were allegedly faulty. We supplied the goods in the last three months of the financial year. We have reliably estimated that if the actions succeed, we are likely to have to pay out GHS10 million in damages to customer A and GHS8 million in damages to customer B. Also, Abebio's legal advisers have reliably estimated that there is a 60% chance that customer A's claim will be successful and a 25% chance that customer B's claim will be successful. I know we have insurance in place to cover us against claims like this. It is highly probable that any claims which were successful would be covered under our policy. Therefore, I would have expected to see a provision for legal claims based on the likelihood of the claims succeeding. However, I would also have expected to see an equivalent asset in respect of amounts recoverable from the insurance company. The financial statements do contain a provision for GHS10 million but no equivalent asset. Disclosure of the information relating to both of the claims and the associated insurance is made in the notes to the financial statements. Required: Given the above facts, discuss the correct accounting treatment of the pending legal cases.
Akash M.
Case 1 Bait-This Ltd signed a 10-year lease agreement with a landlord for a building that they used for their head office. The annual rentalwas R240 000.Circumstances changed for Bait-This Ltd, and they decided to move their head office into the same building as their marketing headquarters. This occurred after they had been in the leased building for six years. Bait-This Ltd were not able to cancel the lease agreement but were able to sublet the building to a tenant of their choosing. The financial director signed an agreement with a tenant for the remainder of the lease at a rental of R210 000 per annum. Refer to Case 1 Q.2.1 In terms of IAS37 Provisions, contingent liabilities and contingent assets, the above (4) contract would meet the definition of what type of contract? Describe the characteristics of this contract in terms of IAS37 Provisions, contingent liabilities and contingent assets. Q.2.2 Explain whether a provision should be raised for the lease, giving a reason for your answer. (3marks) Provide an estimate of the value of the provision that would be recognised in the financial statements, if any. (3 marks) Prepare the journal entry to recognise the provision, if any? A journalnarration is required. (2marks)
Breanna O.
Case 2 On the 15 July 2022, the board of directors of Bait-This Ltd formulated a plan to restructure their divisions and reorganise their operations, The plan involved redundancies of some employees and the relocation of others. The plan for restructure was announced to the employees and the public on 31 August 2022, when it was finalised, and the company commenced implementation one month later. Assets from one of the divisions that was going to be closed were sold for a gain on disposal of R600 000. It was estimated that retrenchment costs would amount to R2 750 000 and that relocation costs would be approximately R220 000. The relocated employees would have to be re trained at a cost of R75 000. Refer to Case 2 2.3) Determine whether Bait-This Ltd should recognise a provision in their financial statements for the year ended 31March 2023. Refer to the definition and recognition criteria for a provision in your answer. 2,4) What is the value of the provision, if any, at the year-end date? Give a brief explanation for your answer and prepare the journal entry to recognise the provision. Ajournal narration is required.
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