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Mango Limited prepares its financial statements to 31 December each year. The following issues need to be resolved before the financial statements for the year ended 31 December 2011 can be finalised.
A fire occurred on 12 January 2012 and destroyed Mango Limited’s factory. The best estimate is that it will cost £12 million to rebuild the premises and replace the machinery and inventory destroyed in the fire. The company is insured but due to unusually high levels of inventory the management of the company believe that it will only be able to recover £11.7 million from the insurance company. Mango Limited’s profit after tax for the year ended 31 December 2011 is £24.9 million.
Requirement:
Advise the directors of Mango Limited as to the appropriate accounting treatment for Issue One in the financial statements for the year ended 31 December 2011 if:
(a)Mango Limited has located alternative premises that it can rent while re-building work is underway and the directors are confident that the company can be fully operational within three weeks of the fire at the new location;
(b)Mango Limited is able to find an alternative premises but it will not be available for at least three months from the date of the fire. Also, due to the highly specialised nature of the machinery used, the manufacturers believe it will be six months before the machinery can be shipped to Mango Limited’s new location.
And what do you believe the answer to be?
(It looks to me like a non-adjusting subsequent event UNLESS going concern is now not applicable in which case it should be treated as an adjusting event)
(As for provisioning … not relevant – it doesn’t satisfy the definition of liability “… arising from some past event …” and a provision is “a liability of uncertain timing or amount)
But those are just my thoughts … what are your’s?
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