Question

In the following separate cases, answer the questions independently.

1. In the year 2018, a director was dismissed and he commenced an action against the company claiming substantial damages for wrongful dismissal. The company's lawyer advised that the ex-director was likely to succeed with his claim estimated to be $1,000,000. In 2019, this case was still unsettled and the company has just found some new evidence showing that the possibility of success of the ex-director's claim was lower, around 30% as advised by the company's lawyer.

Required:

What was the accounting treatment for the claim for 2018 and 2019? Justify your answer. Provide journal entries where applicable. Limit your answer to 50 words.

2. Simple limited is preparing its financial statements for the year ended 31 December 2019. Before the authorization of financial statements for issue, the following material events took place: Limit your answer to 50 words for (a) and (b) respectively.

(a) Simple Limited holds a portfolio of shares listed on the Hong Kong Stock Exchange as at the reporting date. The fair value of the investment portfolio of shares on the reporting date was $3.5 million. The value of such investments had deteriorated by 30% since the reporting date.

(b) Simple Limited carries its inventory at the lower of cost and net realizable value. On 20 January 2020, the company entered into an agreement to sell part of its inventory for $1 million. The cost of inventory as reported in its statement of financial position was $1.5 million.   

Answer 1

Part 1

Rules specify that contingent liabilities should be recorded in books when it is proable that the future event will occur and the amount of the liabilty can be reasonably estimated. However, if it is only reasonably possible that the contingent liability will become a real liability, then a note the financial statement is required.

Year 2018

As per the company the occurance of the contingent liability is only reasonably possible so only a note in the financial statement is required.

Year 2019

On the basis of some evidences found, the company is certain about the contingent liability and has also estimated the amount of liabilit. In this situation the company should record the liability.

Journal:

Litigation Damages Dr.

To Contingent Liabilities

Part 2

A)

As per IAS 10, non-adjusting events are those events which occur after the end of the reporting period that reflect the conditions that arose after the reporting period. These events are not adjusted in the financial statements.

In this case the value of shares deteroriated by 30% after the reporting date, this is a non-adjusting event and affect for the same should not be given in financial statements.

B)

As per US GAAP, the value of inventory should be recorded at net realizable value or cost whichever is lower.

In this case the inventory would be valued at $1.5 million as the market value of part inventory to be sold is $1 million.