Question

(Supplemental Disclosures) It is February 2021 and Janix Corporation is preparing to issue financial statements for the year ended December 31, 2020. To prepare financial statements and related disclosures that are faithfully representative, Janix is reviewing the following events in 2020 and 2021:

1. In August 2020, Maddux Incorporated filed a lawsuit against Janix for alleged patent infringement, claiming $1.8 million in damages. In the opinion of Janix's management and legal counsel, it is not likely that damages will be awarded to Maddux.
2. In January 2021, there was a significant decline in the fair value of Janix's FV-NI investments, resulting in an unrealized holding loss of $720,000.
3. In January 2021, a customer filed a lawsuit against Janix for alleged breach of contract related to services provided in 2020. The customer is seeking damages of $950,000. Janix's legal counsel believes that Janix will likely lose the lawsuit and have to pay between $850,000 and $950,000.
4. In August 2020, Janix signed a contract to purchase 200,000 inventory units in August 2021 for a price of $12 per unit. According to the supplier's price list at December 31, 2020, the price per inventory unit had decreased to $10 per unit.
5. At December 31, 2020, Janix had a $1.1-million demand loan outstanding. The terms of the demand loan restrict Janix's payment of dividends to $2 per common share.
6. On January 31, 2021, Janix issued 100,000 new common shares, raising $2 million in new capital.
7. On January 28, 2021, management settled a dispute with the union of its factory workers. A strike had started on November 14, 2020. A portion of the settlement involved a lump sum payment to each worker in lieu of a retroactive adjustment in pay rate dating back to the beginning of the strike.
Janix prepares financial statements in accordance with IFRS.

Instructions
For each item above, indicate whether the event relates to a provision, contingency, commitment, or subsequent event, and explain the appropriate accounting treatment. If no adjustment or disclosure is required, explain why.

Answer 1

Below I have mentioned which item represents what and the treatment and disclosure required as per IFRS.

1. The lawsuit filed by Maddux is not likely to mature as per the opinion of Janix's management and legal counsel. Thus, it is of the nature of contingent liability. It is an obligation that might take place on the occurence of a future uncertain event. The amount and time of outflow is not estimated at the time of its occurrence. However, as per IFRS if the possibility of outflow is likely it should be disclosed in the notes to financial statements. Since, as per the opinion of management and legal counsel the possibility of maturity is remote, no disclosure is required.

Hence, it is a contingency which should not be recognized or disclosed.

2. The loss on investments have occured after the reporting period and it does not provide any evidence of conditions that existed at the end of reporting period. The loss did not take place because of any factors ar decisions of the company itself. Thus, it is a subsequent event and is non-adjusting in nature. However, as the amount is material disclosure must be made in notes to financial statements to enable stakeholders to make proper decisions based on the financial statements.

Hence, it is a subsequent event which should not be recognized as at the end of reporting period but must be disclosed.

3. Lawsuit filed by customer relates to present obligation as a result of past events. Also as per the opinion of legal counsel there will be a probable outflow and the amount can be measured reliably. Thus, it is a provision which must be recognized. As the amount demanded by customer is $ 950000, and the legal counsel's estimation is between $ 850000 and $ 950000, we take the higher figure (conservatism approach) or play safe approach.

Hence, it is a provision and the following is the treatment.

Treatment in accounts:

Legal expenses of lawsuit $ 950000

Provision for legal expenses of lawsuit $ 950000

4. Contract signed in August 2020 to purchase inventory at a given contractual price is a commitment. It should be disclosed in notes to financial statements. No matter what the price is at the end of reporting period Janix still has to purchase it at the contractual price.

Hence, it is a commitment and needs to be disclosed. No treatment is required in accounts as at the end of reporting period.

5. As the terms of the loan outstanding restrict dividend payment to $ 2 per share, it is also in the nature of contractual commitment. Though dividend issuance is at the discretion of management, however, in this case it cannot be issued above $ 2 per share. As dividends were not issued at the end of reporting period, nor until now, no treatment is required in accounts but it must be disclosed in notes that dividend, if any issued, must be within $ 2 per share.

Hence, it is a commitment and disclosure in notes is required. No entry is required as it is not yet issued.

6. It is a subsequent event and as it took place after the reporting period and did not provide any information or evidence to conditions that existed as at the end of reporting period, it is non-adjusting in nature. Non-adjusting events if they are material enough to influence decision making of stakeholders must be disclosed in notes to financial statements. (Assuming that $ 200000 is material to Janix) isuance of share capital of $ 200000 must be disclosed.

Hence, it is a subsequent event which must be disclosed. No treatment in accounts is required as on the end of reporting period.

7. It is a subsequent event which is adjusting in nature. Adjusting events are those which provide for information or evidence about conditions that existed as at the end of reporting period. As the strike had started in November 14, 2020 it indicated past conditions. As the company settled the matter in January 28, 2021 i.e. just 2 and a half months from when the dispute occurred it is  safe to say that the company had understood that there was reasonable certainty to pay the demands of the union. Thus, this must be accounted for as at the end of reporting period.

Hence, it is a subsequent event but as it is adjusting in nature it must be accounted for as a provision.

Treatment in accounts:

For the amount of retroactive pay rate dispute:

Salaries and wages $ xxxx

Provision for salaries and wages $ xxxx

For the other portion of dispute:

Factory union dispute $ xxxx

Provision for factory union dispute $ xxxx