Question

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.

Answer 1

Ther is two diffrent event and we will provide Accounting treatment separtely for both:

Customer A = Claim GHS10Million (reliably estimated that there is a 60% chance in favor of customer)

when chances are more than 50% then it is called Probable contingency.

In case of Probable contingencywe have make provision in books for this by GHS 10 Million.

Further, When some / All expenditure require to settle a provision is expected that it will be reimburse by the Other party (here insuranace company) then the reimbursement should be recognised as a seprate asset. Here we will create an asset of equal value.

Customer B = Claim GHS8 Million (reliably estimated that there is a 25% chance in favor of customer)

when chances are less than 50% then it is called Possible contingency.

In case of possible contigency we have make show as a footnote for this liability.

In this case we will not create an asset for reimbursement.