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Hi sir, for December 2011 Exam, question 5(b)
Regarding the LAWSUIT,
It’s stated in the answer key, that “although the settlement was agreed after the year end, it provides evidence that the company had a present obligation as at the year end”
I don’t get it. Why would the company have a present obligation at the year end when the settlement was only agreed after the year end ? Could you explain sir ?
Because the event that gave rise to the law suit happened before year end and the probable or possible liability arose on that date. When the case is decided, we find out what the liability is, but the liability was created before year end.
If it is probable that the company will have to pay a fine or damages, then a provision is set up in the FS. If it is thought only possible that money will have to be paid then there should be a note in the FS . If it is highly unlikely that money will have to be paid (remote) then nothing has to be done.
Thanks sir. I got it. I noticed in the answer key, they have stated that this $0.6m represents 8% of profit.
But why didn’t they find out how much this $0.6m represents out of revenue, like how they did for Receivable ?
Well, 8% of profit makes it material so there is little need to check revenue also.