Question

Id Stores, a wholesaler chain of stores, has over 500 branches nationwide. Their product range is divided into six main categories i.e. Toiletries, Electronics, Food, “The Corporate World”, wearing apparel, and Toys. The following information relates to the accounting period just ended:
I. Although this varies from product range to product range but the company generally allows the dissatisfied customers a return policy of 30 days. (For Electronics this policy generally, however, is 1 year & for toys its 90 days). There is a 40% probability of 5% goods being returned in general category and 60% probability of 3% goods being returned. 3% of the Toys’ customers usually come up with the defective goods. Complaints regarding the Electronics are channelized back to the suppliers.
II. On May 2nd 2008, an employee got injured while unloading the goods in the company godowns. He later sued the company for having a lack in the safety measures for its employees, damages and other amounts mentioned in the claim is 1.5 million. According to the legal advisors it is highly probable that court may award a 500,000 compensation in total.
III. At the year end, the company had 950 laptops of a good brand each costing Rs.65,000. There was rising trend of prices in the market, which influenced the company’s sale policy and these computers were retained in stock till July 25, 2008 when market price started falling and within one week’s time declined to Rs.68,000. This situation forced the management to start selling. However, the whole stock could be sold till August 22, 2008 and fetched total sale proceeds of Rs.40.85 million.
IV. The Government announced on 5th July that the rates of taxes will be changed, and all changes shall be applied retrospectively.
V. A suit for infringement of patents, seeking damages of Rs. 2 million, was filed by a third party. SL’s legal consultant is of the opinion that an unfavourable outcome is most likely. On the basis of past experience he has advised that there is 60% probability that the amount of damages would be Rs. 1 million and 40% likelihood that the amount would be Rs. 1.5 million
VI. The Board of Directors announced on August 25th a 20% stock dividend for the year ended 30th June, 2008.
VII. Investments of the company amounting to Rs.10 million at the year end were disposed off for Rs. 6 million in response to a market crash on July 27, 2008.
VIII. A law suit for Rs.500,000 was filed. Unfavorable outcome is probable. A reasonable Estimate of Court’s award is in the range between Rs.100,000 and Rs.400,000. The company’s legal advisor believes the best estimate of potential liability is Rs.200,000.
IX. During December 2009, law suit was filed against the company claiming Rs.800, 000. In the opinion of legal advisor it is reasonably possible that damages will be awarded to the plaintiff.    
Required:
How the matters presented above are adjusted in the financial statements for the period? Accounting year ends on 30th June 2008.
(Matters should be discussed in accordance with IAS-37)

Answer 1

Answer:
As per IAS 37 i.e Provision continget asset and liability .
we Recognise revenue if and only if :
	a present obligation has arisen as a result of a past event .
	payment is probable ( more likely then not )
	the amount can be estimate reliabily .
1)	In the given case it fulfilled all condition for recognising revenue i.e it is present obligation i.e refund as a result of past event i.e sale . And payment os probable as it is policy of company . And amount also can be estimate through sales revenue .
	After looking for recognition criteria we will check measuremnt criteria also so in given case amount would be measured at a probability - weighted expected value .
	So in this case provision should be made as probability * sales value .
2)	As we see in legal cases recognition criteria is basically depends on probability . In the given case also legal advisor is probable that only 500000 compensation in total may be awarded not the amount claimed i.e 1.5 Million . So provision to be made for 500000 amount and entry would be :
	P/l A/c (expense ) A/ debit	500000
	To Provision for liablity	500000
	Provision for liabilty will be shown as current liabilty in balance sheet .
3)	As per IAS 37 there should be no provision made for expected future operating losses . So no provision should br made for expected lesser sale price .
	but it will account for IAS 10
4)	In this given case tax rate would be applied retrospectively . Which is accounted under IAS 12 that is provision for taxes and here out of scope of IAS 37.
5)	In this case it is probable that economic resources is likey to go for the past event so provision need to create and it should be maesured as per weighted probability method . Amount is 1 Million * 60% + 1.5 Million *40% = 1.2 million . So provision is to made for 1.2 million and will be shown as a current libilty and expensed on other side.
6)	Declaration of dividend is itself a adsjustment event as IAS 10 and not to accounted under IAS 37.
7)	As per IAS 37 provision is to be created for past event and not for future operating losses . In this case loss is to be shown in other comprehensive Income statement in the respective year and it will not be account as per IAS 37.
8)	As we see in legal cases recognition criteria is basically depends on probability . In the given case also legal advisor is probable that only 200000 compensation in total may be pay not the amount claimed i.e Rs 500000 . So provision to be made for 200000 amount and entry would be :
	P/l A/c (expense ) A/ debit	200000
	To Provision for liablity	200000
9)	As we see in legal cases recognition criteria is basically depends on probability . In the given case also legal advisor is probable that only Rs 800000 . So provision to be made for 800000 amount and entry would be :
	P/l A/c (expense ) A/ debit	800000
	To Provision for liablity	800000