- This topic has 1 reply, 2 voices, and was last updated 3 hours ago by
.
- Posts
greeting sir
sir i cam across an OTQ case in study hub which was the same in kaplan kit named jeffer co;Jeffers Co is preparing its financial statements for the year ended 31 December 20X8. The financial statements are expected to be authorised for issue on 15 March 20X9.
The following three events have occurred in January 20X9:
1) Health and safety fine
A health and safety investigation into an incident which occurred in 20X8 was concluded in January 20X9, resulting in a $1.5m fine for Jeffers Co. A provision for a fine of $1m had been recognised in Jeffers Co’s financial statements for the year ended 31 December 20X8.2) Customer ceased trading
Notice was received on 10 January 20X9 that a customer owing $1.2m at 31 December 20X8 had ceased trading after suffering liquidity problems for some months. It is unlikely that the debt will be recovered in full.3) Acquisition of a competitor
The acquisition of a competitor was finalised on 10 January 20X9, being the date Jeffers Co obtained control over the competitor. Negotiations in respect of the acquisition commenced in May 20X8.In addition to this, there is an outstanding court case at 31 December 20X8 relating to faulty goods supplied by Jeffers Co. Legal advice states that there is a small chance that Jeffers Co will have to pay out $6m, but the most likely outcome is believed to be a payout of $5m. Either way, Jeffers Co will have to pay legal fees of $0.2m for legal advice received to date. All payments are expected to be made on 31 December 20X9. Jeffers Co has a cost of capital of 10% (discount factor 0.909).
Jeffers Co believes the fault lies with the supplier, and is pursuing a counter-claim. Legal advice states that it is possible, but not likely, that this action will succeed.
Question
3. What amount should be recorded as a provision in respect of the outstanding court case against Jeffers Co as at 31 December 20X8? (to the nearest hundred thousand)?A.$5.2m
B.$5.0m
C.$4.7m
D.$4.5mI want clear explanation on this question sir why its D
=> in the kaplan its option C and here in study hub it says the follwing:
he correct answer is D.The provision for damages should be measured at the best estimate of the amount ($5m). Since this is payable in one years’ time it should be discounted to present value.
The cost of legal advice is recognised as an accrual, not part of the provision.
I also had this confusion. This confusion relates to legal cases where the question says that cost will be incurred whether case is won or lost. I saw that in some cases provision was created while in other the solution said that legal costs will be recognized when paid no provison.
I emailed Study hub about this and I got the response that , in whatever question if question asks about this type of legal costs the correct answer is to not create a provision.
For example, this was the confusion I asked with study hub in email:-
‘I am a lot confused about study hub treatment on legal costs related to IAS 37.
I am sending two different scenarios and their solutions. I feel both scenerios are almost same but the answers as per study hub are just opposite.
As the exam is near, it troubles me.The first scenerio is from Study Questions Ch 3 : question 2 ‘CANDEL’ and the second one is from Study Questions Ch 15 : ‘ROVERS’ (scenario b).’
And this was their response:-
‘Thank you for drawing our attention to this issue. We can advise that legal costs should be recognised as a liability when an obligation to pay them exists. For exam purposes, this is generally when legal services have been provided, as reflected in the solution to question Rover. I can confirm the solution to Candal is being amended in line with Rover, but hasn’t yet been updated in the Study Hub. This will be actioned in September.’
- You must be logged in to reply to this topic.