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Dear Mike
Good morning, Sir.:)
Question>
During the year to 31 March 20#9, a customer started legal proceedings against a company, claiming that one of the food products that it manufactures had caused several members of his family to become seriously ill. The company’s lawyers have advised that this action will probably not succeed.
Should the company disclose this in its financial statements?
Solution.
> Legal advice is that the claim is unlikely to succeed.
(i don’t understand why it is unlikely to succeed)> It is unlikely that the company has a present obligation to compensate the customer and therefore no provision should be recognized.
> There is, however, a contingent liability. (why it is a contingent liability? the question doesn’t tell me anything that indicates “possible” degree of probability. how do they know it is a contingent liability?)
> Unless the possibility of a transfer of economic benefits is remote, the financial statements should disclose a brief description of the nature of the contingent liability, an estimate of its financial effect and an indication of the uncertainties relating to the amount or timing of any outflow.
there are my questions in the parentheses.
have a nice day Mike!
Regard
your student.“Legal advice is that the claim is unlikely to succeed.
(i don’t understand why it is unlikely to succeed)”Because that’s what the lawyers say! maybe the claim is spurious or lacking supporting evidence – medical analysis of ‘victim’s’ samples? Anybody else claiming similar illnesses having eaten the same product?
There is a potential liability
Clearly it’s not virtually certain – it’s not got a greater than 95% chance of crystallising
And the lawyers tell us that the case will probably not succeed – so that means that we have a less than 50% chance of losing (or a greater than 50% chance of winning)
But this person has written and has started legal proceedings against the company, so there is a possibility that a court may find the company liable, so that’s where the contingency comes in – if it exists and it’s not probable, then it must be just possible
Is that last paragraph a question? What you have written is correct – the situation requires a disclosure note showing all that detail. But there is no amount recognised as ann actual liability within the financial statements
OK?
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