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  1. Hi Sir, i wanna ask about the explanation about this question

    Question: ACCA F7 June 2007
    (iii) Tentacle is being sued by an employee who lost a limb in an accident while at work on 15 March 2007.
    The company is contesting the claim as the employee was not following the safety procedures that he had
    been instructed to use. Accordingly the financial statements include a note of a contingent liability of
    $500,000 for personal injury damages. In a recently decided case where a similar injury was sustained, a
    settlement figure of $750,000 was awarded by the court. Although the injury was similar, the circumstances
    of the accident in the decided case are different from those of Tentacle’s case.

    Answer: Tentacle has correctly treated the outstanding litigation as a contingent liability. The settlement of a court case after the
    balance sheet date may confirm (or otherwise) the existence of an obligation at the year end and would be an example
    of an adjusting event. This would then require that either the disclosure note of the contingency is removed or the
    obligation should be provided for dependent on the outcome of the litigation. However, this is not quite the case in
    Tentacle’s example. The circumstances of the claim against Tentacle are different from those of the recently settled case.
    So this settlement does not appear to have any effect on the likelihood of Tentacle losing the case. What it does
    (potentially) affect is the estimated amount of the liability. IAS 10 refers to this situation as an updating disclosure. The
    only required change to the financial statements would be to update the disclosure note on the contingent liability to
    reflect that the potential liability has increased from $500,000 to $750,000.

    My Question is , why we have to increase the contingent liability to $750000? and note changing it to provision?

    Thanks in advance

    • Because the goods were not, in fact, sold! Wellmay has the opportunity to repurchase and not all the risks and rewards of ownership have been transferred

      So, if it’s not a sale, what is it?

      It’s a secured loan where the goods are the security

      That’s easy enough.

      But, again, if it’s ot a sale, then it must still be part of Wellmay’s inventory and that is why we have to increase inventory

      OK?

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