Question Tag: IAS 37

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CR – Nov 2024 – L3 – Q3a – Share-Based Payment and Contingent Liabilities

Accounting for share-based payments and contingent liabilities in financial statements.

Question

(i) Share-Based Payment

Pee Manka PLC (PM), a hyper-growing firm in Ghana, prepares its financial statements on 31 December.

The following information is relevant:

The financial statements are authorised for issue on 31 March. On 31 December 2021, PM issued share options to seven (7) of its senior executives, giving each executive the option to purchase 2 million shares at GH¢6.50 per share. The fair value of each option at that date was GH¢4.00. The exercise of the share options was conditional on the completion of two-years’ service from 31 December 2021.

The company’s share price on subsequent dates was as follows:

Date	Share Price (GH¢)
31 December 2022	13.50
31 December 2023	17.50

On 31 March 2023, after the 2022 financial statements were authorised for issue, PM’s Chief Finance Officer, one of the seven executives, unexpectedly resigned from her position in the company.
On 30 April 2023 another executive, Mrs. Torsah, was dismissed.
The five remaining executives exercised their options on 31 December 2023.

Required:

In line with IFRS 2: Share-Based Payment, recommend how the above scenario would have been dealt with in the financial statements of PM for the year ended 31 December 2023. (6 marks)

(ii) Contingent Liabilities and Share-Based Payment

Mrs. Torsah, who was dismissed, immediately instigated legal proceedings against PM, and it was probable, on the 28 February 2024, that she would be deemed to have completed the two-year qualifying period of her share option agreement.
Legal advice at that time was that she was also likely to be awarded GH¢3.5 million in compensation, and that it was possible that this could rise to GH¢5.8 million.

Required:

In line with IFRS 2: Share-Based Payment and IAS 37: Provisions, Contingent Liabilities and Contingent Assets, explain how the above scenario would impact your results in (i) above.

Answer

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Tags: Contingent Liabilities, Employee Benefits, IAS 37, IFRS 2, Legal claims, Share Options
Level: Level 3

Topic: IAS 37: Provisions, Contingent Liabilities and Contingent Assets, IFRS 2: Share-Based Payments
Series: Nov 2024

CR – Nov 2024 – L3 – Q2b – Accounting for Legal Claims

Assess and account for a legal claim against Agropah PLC under IAS 37.

Question

ropah PLC (Agropah) prepares its financial statements to 30 June and usually authorizes them for issue on 25 August.

On 15 July 2024, Agropah received notice of a legal claim made by Odametey, a customer, for loss of profits allegedly due to the supply of faulty goods by Agropah on 30 April 2024. The amount claimed was GH¢5 million.

The directors of Agropah have estimated the following possible outcomes in respect of this legal claim:

28% chance that the claim will not succeed.
45% chance that the claim will succeed, and Odametey will be awarded GH¢3.2 million.
27% chance that the claim will succeed, and Odametey will be awarded GH¢5 million.

Required:

In line with IAS 37: Provisions, Contingent Liabilities & Contingent Assets, explain how this legal claim should be accounted for and reported in the financial statements of Agropah for the year ended 30 June 2024.

Answer

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Tags: Contingent Liability, Financial Reporting, IAS 10, IAS 37, Legal Claim, Provision
Level: Level 3

FR – Nov 2024 – L2 – Q2a – Provisions and Contingent Liabilities

Determining the correct accounting treatment for warranty obligations and legal provisions in Kamara LTD’s financial statements.

Question

Kamara LTD manufactures and sells health equipment and has a financial year-end of March 2024. It offers a one-year guarantee for equipment supplied directly to clients. One of the company’s clients is suing the business at the financial year-end for failing to fix equipment within the guarantee period. The company argues that the issue is due to the client disregarding usage instructions, and Kamara LTD believes it is not liable.

Kamara LTD’s lawyer has advised that it is more likely than not that the company will not be found liable. If found liable, the company is estimated to incur legal expenses of approximately GH¢24,000.

Kamara LTD also manufactures another line of equipment sold to wholesalers. During the financial year, it sold 3,200 items of this equipment, which come with a one-year repair guarantee. Based on past experience, 10% of items sold are returned for repairs. Of these returns:

70% require minor repairs at a cost of GH¢64 per item.
30% require significant repairs at a cost of GH¢200 per item.

Required:
Determine the correct accounting treatment to deal with the above issues in the books of Kamara LTD for the year ended 31 March 2024.

Answer

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Tags: Accounting Treatment, Contingent Liabilities, Expected Value Calculation, IAS 37, Legal Expenses, Provisions, Warranty Obligations
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: Nov 2024

CR – May 2016 – L3 – Q4b – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Discuss how the environmental liability for LALUPON Plc, arising from hazardous pollution, should be accounted for in its financial statements.

Question

LALUPON Plc owns a piece of land in a residential area. PONJEB Ltd has leased the piece of land from LALUPON Plc and is using it to store and dispense gas. The Federal government has announced its intention to enact environmental legislation requiring property owners to accept liability for environmental pollution. As a result, LALUPON Plc introduced a hazardous policy and has begun to apply the policy to its properties.

LALUPON Plc has had a report of a gas leakage and subsequent fire outbreak which damaged surrounding properties, but no life was lost. LALUPON Plc has no right of recourse against PONJEB Ltd or its insurance company for the clean-up and compensations to owners of properties destroyed. At April 30, 2014, it is virtually certain that draft legislation requiring a clean-up of the land and payment of compensations to victims will be enacted.

Required:
Discuss how the above events should be accounted for in the financial statements of LALUPON Plc.

Answer

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Tags: Contingent Liabilities, Environmental Liability, IAS 37, Land Pollution, Legislation, Provisions
Level: Level 3

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

CR – May 2021 – L3 – Q5b – Provisions, Contingent Liabilities, and Discounted Cash Flows (IAS 37)

Calculate provisions and charges for emission modifications in 2015 and 2016 for Gama Plastic Limited.

Question

Gama Plastic Limited owns a number of plastic recycling plants in various parts of the country which supply most of the raw material used by Gama Plastic Limited for its production of household and corporate plastic products.

On December 1, 2015, the directors of Gama Plastic Limited announced publicly that it intends to voluntarily reduce the level of harmful emissions from its recycling plants through modifications of the plants.

The average useful economic life of these plants as of December 31, 2015, was 15 years. Gama Plastic Limited charges depreciation in relation to the recycling plants to cost of sales on a straight-line basis.

The directors believe that while the modifications will be effective from early 2016 onward, the actual cash costs of the modifications will be as follows:

Date	Amount (N’000)
December 31, 2016	100,000
December 31, 2017	80,000
December 31, 2018	140,000

No contract was signed until 2016, but Gama Plastic Limited prides itself on its excellent public image and has a well-known reputation for meeting both legal and constructive obligations.

The directors of Gama Plastic Limited believe that it is appropriate to use discounted cash flow techniques and that an appropriate rate would be 10%, with the following discount factors:

Year	PV Factor
1	0.909
2	0.826
3	0.751
4	0.683
5	0.620
6	0.564

Required:

Assuming the actual cash cost of the modification is a reliable estimate, calculate the provisions that should be included in the statement of financial position and the charges to the statement of profit or loss of Gama Plastic Limited in respect of the proposal for each of the years 2015 and 2016. (7 Marks)

Answer

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Tags: Depreciation, Discounted Cash Flow, Emission Modifications, IAS 37, Provisions
Level: Level 3

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

CR – May 2021 – L3 – Q5a – Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)

Define provisions and discuss their misuse in creative accounting.

Question

International Accounting Standard (IAS) 37 on Provisions, Contingent Liabilities, and Contingent Assets sets out the principles of accounting for these items. The inappropriate use of provisions has been an area where companies have been accused of manipulating financial statements and engaging in creative accounting.

Required:

What is provisions, and how is it employed by management to engage in creative accounting? (7 Marks)

Answer

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Tags: Contingent Liabilities, Creative Accounting, IAS 37, Provisions
Level: Level 3

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

CR – May 2023 – L3 – Q2a – Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)

Analyze Octopus Petroleum’s performance and ability to finance future oil spill costs

Question

Octopus Petroleum PLC is a multinational oil and gas group operating in the Niger Delta areas of Nigeria. The company has been highly profitable over the years. The group explores and extracts natural resources, holds reserves, and has recently become involved in the downstream sector by opening various commercial retail outlets for the sale of petrol to motorists.

In June 2020, the company was involved in an ecological disaster in the Ogoni area of Niger Delta as a result of massive oil spillage due to some technical faults, thereby resulting in spilling oil into the surrounding ocean and damaging wildlife and local communities.

Investors are concerned about the future prospects of Octopus Petroleum PLC and whether it represents a safe investment since the company normally operates in the lucrative oil and gas sector.

Octopus Petroleum Group annual report for the year 2020 and its comparative figures are shown below:

Octopus Petroleum Group Consolidated Statement of Profit or Loss for the Year Ended December 31

Octopus Petroleum Group Consolidated Statement of Financial Position as at December 31

Additional Information:

The N3,700 million provision for the Ogoni oil spill is an estimated cost net of relevant tax.
Calculating the financial cost of the oil spill in Ogoni land has been slightly problematic. However, N530 million had been expended by year-end, while the future costs of clean-up and compensation are undetermined.
One uncertain cost is fines payable to the Federal Government of Nigeria. Past fines have exceeded N2,500 million.
Octopus Petroleum Group vertically integrated in 2020 by acquiring and rebranding petrol stations.
Oil reserves were at record-high levels in 2020.
Oil prices increased by approximately 5% during 2020.
The company values inventory on a last-in-first-out (LIFO) basis, which contravenes IAS 2.
Dividend payments remained at N625 million for both 2020 and 2019.
Investors typically evaluate companies using these ratios:
- Profitability Ratios:
  - Return on Capital Employed (ROCE)
  - Return on Equity (ROE)
  - Gross Profit Percentage
  - Operating Profit Percentage
- Liquidity Ratios:
  - Current Ratio
  - Acid Test Ratio
- Resource Utilization and Financial Position Ratios:
  - Inventory Turnover
  - Asset Turnover
  - Interest Cover
  - Gearing Ratio

Required:

(a) Analyze the performance of Octopus Petroleum Group over the two-year period. Your analysis should also consider the group’s ability to finance the cost of the oil spill in Ogoni land in the coming years. (14 Marks)

Answer

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Tags: Environmental Issues, Gearing, IAS 2, IAS 37, Liquidity Ratios, Oil Spill Costs, Profitability Ratios
Level: Level 3

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

CR – Nov 2023 – L3 – SC – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Evaluate Roman Limited's recognition of provision for emission reduction costs, compute the provision amounts, and explain the profit or loss components.

Question

Roman Limited prepares its financial statements in accordance with International Accounting Standards. On March 16, 2017, Roman Limited made a public announcement of a decision to reduce the level of emission of harmful chemicals from its factories. The average useful life of the factories on March 31, 2017 was 25 years. The depreciation of the factories is computed on a straight-line basis and charged to cost of sales. The directors formulated the proposal for emission reduction following an agreement in principle earlier in the year.

The directors prepared detailed estimates of the costs of their proposals, showing the following expenditures:

N60 million on March 31, 2018
N60 million on March 31, 2019
N80 million on March 31, 2020

All estimates were for actual anticipated cash payments. No contracts were entered into until after April 1, 2017. The estimate proved accurate regarding the expenditure due on March 31, 2018. When the directors decided to proceed with this project, they used discounted cash flow techniques to appraise the proposed investment, with an annual discount rate of 8%. The company has a reputation for fulfilling its financial commitments after it has publicly announced them. Roman Limited has made a provision for the expected costs of its proposal in the financial statements for the year ended March 31, 2017.

In accordance with the provisions of IAS 37 – Provisions, Contingent Liabilities, and Contingent Assets:

Required:
a. Explain the decision of the directors of Roman Limited to recognize the provision in the statement of financial position as at March 31, 2017.
(6 Marks)

b. Compute the appropriate provisions in the statement of financial position in respect of the proposed expenditure at March 31, 2017, and March 31, 2018.
(4 Marks)

Compute the TWO components of the charge to the statement of profit or loss in respect of the proposal for the year ended March 31, 2018. You should explain how each component arises and identify where in the statement of profit or loss each component is reported.
(5 Marks)

(Total 15 Marks)

Answer

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Tags: Contingent Liabilities, Depreciation, Discounted Cash Flow, Emission Reduction, Environmental Commitment, IAS 37, Provisions
Level: Level 3

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)
Series: NOV 2023

AAA – Nov 2017 – L3 – Q5 – Audit Evidence

Evaluate XYZ Bank’s provision for litigation, discuss audit procedures per ISA 501, and prepare litigation disclosure for financial statements.

Question

You are the audit manager for XYZ Bank Limited for the year ended December 31, 2016. The Bank’s Board noted a litigation issue involving a lawsuit from BBB Limited, where the Bank was found liable for a cheque conversion worth ₦2.1 billion. The high court imposed a penalty on the Bank for this amount, which BBB Limited is now claiming.

The Bank has objected to the judgment, appealing to the Court of Appeal, with legal counsel advising that a favorable outcome is expected. The Bank’s litigation-related financial information is as follows:

Provision for litigation (recognized in financial statements): ₦96 million
Litigation cases as defendant: 50
Litigation cases as plaintiff: 10
Claims in favor of the Bank: ₦2.7 billion
Claims against the Bank (including the ₦2.1 billion case): ₦3.2 billion

Requirements:
a. Discuss FOUR specific considerations under ISA 501 for obtaining audit evidence on litigation provisions.

(5 Marks)
b. Evaluate the adequacy of the litigation provision recognized in the financial statements as at December 31, 2016.

(5 Marks)
c. Prepare a summary disclosure of the litigation status for inclusion in the financial statement notes as at December 31, 2016.

(5 Marks)

Answer

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Tags: Audit evidence, Financial Disclosure, IAS 37, Litigation, Provisions
Level: Level 3

Topic: Audit evidence
Series: NOV 2017

FR – May 2017 – L2 – SB – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Explain criteria for recognizing provisions, differentiate between provisions and contingent liabilities, and apply IAS 37 to specific company scenarios.

Question

a. IAS – 37 applies to all provisions and contingencies apart from those covered by the specific requirement of other standards.

Therefore, provisions differ from other liabilities because there is uncertainty about timing or amount of the future cashflow required to settle the liability.

Required:

Explain the criteria for recognition of provisions in the financial statements and distinguish between provisions and contingent liabilities.
(6 Marks)

b. The following activities took place in THREE different companies:

Otapiapia Plc: A Rat Trap Company based in Nigeria has just secured exportation of rat killers to South Africa. The advertising slogan of the rat killers is “KILL the BLACKS.” A South African anti-racist movement with a representative in Nigeria is claiming N15,000,000 from the company as damages because the advertising slogan allegedly compromises the dignity of black people. The company’s legal representative believes that the success of the claim will depend on the judge who presides over the case. They estimate, however, that there is a 70 percent probability that the claim will be thrown out and a 30 percent probability that it will succeed.
Ire-Akari Motors Plc: A Nigerian company that specialises in the manufacture of “made-in-Nigeria cars.” During the current financial year, 100 cars have been completed and sold. During testing, a defect was found in their steering mechanism. All 100 customers that bought the cars were duly informed of the defect and were told to bring their cars back to have the defects repaired at no cost. All the customers have indicated that this is the only remedy they require. The estimated cost of the recall is N10.5m. The manufacturer of the steering mechanism, a quoted company with sufficient funds, has accepted responsibility for the defect and has undertaken to reimburse Ire-Akari Motors Plc for all costs that it might incur.
Abeokuta Electricity Company Plc: This company sold a number of electricity transformers with a warranty in the year ended December 31, 2015. At the beginning of the year, the provisions for warranty stood at N5,625,000. A number of claims have been settled during the period for N3,000,000. At the year-end, there were unsettled claims for 300 customers. Experience is that 40% of the claims submitted do not fulfil warranty conditions and can be defended at no cost. The average cost of settling other claims will be N52,500 each.

Required: Explain how the matters in (b)(i) to (b)(iii) above should be accounted for in the financial statements of the three companies using figures to illustrate your points where appropriate.
(9 Marks)

Answer

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Tags: Contingencies, Financial Statements, IAS 37, Liability, Provisions, Recognition, Warranty Claims
Level: Level 2

Topic: Provisions, Contingent Liabilities and Contingent Assets (IAS 37)
Series: MAY 2017

FR – Nov 2019 – L2 – Q4b – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Distinguish between provisions, contingent liabilities, and contingent assets as defined in IAS 37.

Question

IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, sets out the principles of accounting for these items and classifies when provisions should not be made prior to its issue. The inappropriate use of provisions has been an area where companies have been accused of manipulating financial statements and of creative accounting.

Required:

Distinguish between provisions, contingent liabilities, and contingent assets as contained in IAS 37.
(14 Marks)

Required:

Distinguish between provisions, contingent liabilities, and contingent assets as contained in IAS 37.
(14 Marks)

Answer

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Tags: Contingent Assets, Contingent Liabilities, IAS 37, Provisions
Level: Level 2

Topic: Contingent Liabilities and Contingent Assets (IAS 37)
Series: NOV 2019

FR – Dec 2022 – L2 – Q5b – Definition of Liability and Provisions

This question asks candidates to define liabilities and describe circumstances under which provisions should be recognized.

Question

The definition of a liability forms an important element of the International Accounting
Standards Board’s Framework for the Preparation and Presentation of Financial Statements
which, in turn, forms the basis for IAS 37: Provisions, Contingent Liabilities and Contingent
Assets.

Required

Define liability and describe the circumstances under which provisions should be recognized.

Answer

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Tags: Contingent Assets, Contingent Liabilities, Financial Reporting, IAS 37, IFRS Standards, Provisions
Level: Level 2

Topic: IAS 37: Provisions, Contingent Liabilities and Contingent Assets
Series: DEC 2022

FR – Mar/Jul 2020 – L2 – Q2b – Recognition of Provisions under IAS 37

Explain the recognition criteria for provisions in accordance with IAS 37, including situations when provisions should be recognized.

Question

Explain the recognition criteria on provisions in accordance with International Accounting Standards (IAS 37) on provisions, contingent liabilities, and contingent assets. (5 Marks)

Answer

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Tags: Contingent Liabilities, Financial Reporting, IAS 37, Provisions, Recognition Criteria
Level: Level 2

FR – Mar/Jul 2020 – L2 – Q2c – Disclosure Requirements of IAS 37

Outline the disclosure requirements for provisions as per IAS 37.

Question

What are the disclosure requirements of International Accounting Standards (IAS 37) on provisions? (5 Marks)

Answer

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Tags: Contingent Liabilities, Disclosure Requirements, Financial Reporting, IAS 37, Provisions
Level: Level 2

Topic: Provisions and Contingent Liabilities
Series: MAR/JULY 2020

FR – Nov 2023 – L2 – Q2d – Financial Reporting Standards and Their Applications

Explain the financial reporting treatment of decommissioning costs in the financial statements of Taini Ltd under IAS 37.

Question

Taini Ltd (Taini) is a listed mining company that operates in the Bono Region with a ten-year term concession commencing on 1 April 2022. After the expiry of the current mining term, Taini has a duty to rehabilitate the area. These rehabilitations are anticipated to cost GH¢12.09 million on April 1, 2032. On April 1, 2022, the present value of the restoration cost was calculated using the company’s 8% cost of capital at GH¢5.6 million.

Required:
In accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets, explain the financial reporting treatment of the above transaction in the financial statements of Taini Ltd for the year ended 31 March 2023.

Answer

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Tags: Contingent Liabilities, Decommissioning Costs, IAS 37, Provisions, Rehabilitation Costs
Level: Level 2

Topic: Financial Reporting Standards and Their Applications, Provisions and Contingent Liabilities
Series: NOV 2023

FR – July 2023 – L2 – Q2d – Contingent Liabilities and Assets (IAS 37)

Explanation of contingent liabilities and contingent assets according to IAS 37.

Question

The objective of IAS 37: Provisions, Contingent Liabilities, and Contingent Assets is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities, and contingent assets, and that sufficient information is disclosed in the notes to the financial statements to enable users to understand their nature, timing, and amount.

Required:
Explain Contingent Liability and Contingent Asset as used in the statement above.
(Total: 3 marks)

Answer

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Tags: Contingent Asset, Contingent Liability, Disclosure, Financial Reporting, IAS 37
Level: Level 2

Topic: contingent liabilities and contingent assets
Series: JULY 2023

AA – Mar 2023 – L2 – Q4a – Completion Procedures and Reporting

Explain the auditor's responsibilities regarding subsequent events and how a legal claim should be reported in financial statements.

Question

You are an audit assistant for an audit client with a year-end of 31 December 2021. A major customer has instituted a legal action against the company for faulty goods supplied after the year-end. A recently recruited intern who was part of your team was of the opinion that because of the cut-off assertion, any event after 31 December 2021 should not affect the financial statements and therefore the auditor should have no responsibility for issues occurring after the reporting year.

Following your audit of the client, you have concluded that there is a possibility, but not a probability, that the claim will be successful. However, management has decided not to make a provision or disclosure in the financial statements for this matter.

Required:
In reference to the preamble:
i) Describe the auditor’s responsibility for subsequent events occurring between:

The year-end date and the date the auditor’s report is signed; and
The date the auditor’s report is signed and the date the financial statements are issued. (6 marks)

ii) Explain how the matter should be reported in the financial statements. (4 marks)

Answer

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Tags: Auditors' responsibilities, Financial Statements, IAS 37, Legal claims, Subsequent Events
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAR 2023

AA – Nov 2017 – L2 – Q5a – Audit and Assurance Risk Environment

Summary: Discuss the impact of an ongoing lawsuit on the audit report if the matter remains unresolved.

Question

Lexon Institute provides tuition for accountancy studies writing professional examinations. You are the audit manager of DAR and Co. Chartered Accountants. The following were identified during the financial audit of Lexon. Revenue is GH¢30m, Profit before tax is GH¢10 million and total assets is GH¢25 million.

i) The regulator of the Accountancy profession has filed a lawsuit against Lexon Institute for GH¢3.9 million alleging a non-compliance with the Regulators rules and regulations for running a tuition center. This case is ongoing and will not be resolved prior to the audit report being signed. The matter is disclosed as a contingent liability.
(4 marks)

ii) Depreciation has been calculated on the total of land and buildings. In previous years it has only been charged on buildings. Total depreciation is GH¢2·5 million and the element charged to land is GH¢2 million.
(4 marks)

iii) Lexon Institute’s computerised purchases is backed up daily, however for a period of three months the purchases records and the back-ups have been corrupted, and therefore cannot be accessed. Purchases for these three months amounted to GH¢4m.
(4 marks)

Required:
Discuss each of these issues and describe the impact on the audit report if the above issues remain unresolved.

(Total: 15 marks)

Answer

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Tags: Audit report, Contingent Liability, Financial Reporting, IAS 37, Lawsuit
Level: Level 2

Topic: Audit and Assurance Evidence
Series: NOV 2017

AA – May 2021 – L2 – Q5b – Completion Procedures and Reporting

Discuss the impact of unresolved issues related to redundancy provision and contingent liability on the Auditor’s report.

Question

Logistics Ltd is a logistics and freight forwarding company based in the port city of Takoradi, and you are the Audit Manager in charge of the year-end audit. The draft financial statements show a profit before tax of GH¢2.6 million and total assets of GH¢18 million.

In your discussion with management, the following issues came up:

i) Management informed you that due to the ongoing coronavirus pandemic, shipping from China has slowed down considerably, and as a result, many employees have been laid off. A redundancy provision of GH¢220,000 is included in the draft financial statements. The audit review and calculations confirmed that the redundancy provision should be GH¢450,000. The Finance Director is, however, not willing to adjust the draft financial statements. (5 marks)

ii) An employee has filed a wrongful dismissal lawsuit against Logistics Ltd for GH¢1.2 million. This case is ongoing and will not be resolved before the Auditor’s report is signed. The matter is disclosed as a contingent liability. (5 marks)

Required:
Discuss each of the issues and describe their impact on the Auditor’s report, if any, should these issues remain unresolved in terms of ISA 705 (revised); Modification of the Auditor’s Opinion.

Answer

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Tags: Audit report, Contingent Liability, IAS 37, ISA 705, Redundancy Provision
Level: Level 2

Topic: Completion Procedures and Reporting
Series: MAY 2021

AA – April 2022 – L2 – Q4a – Completion Procedures and Reporting

Discusses the need to amend financial statements based on subsequent events and the auditor's responsibility in the post-year-end period.

Question

a) Aseye Ltd is in the manufacturing sector and its year-end is 30 September 2019. The final audit is nearly complete and it is proposed that the financial statements and audit report will be signed on 10 November 2019. Revenue for the year is GH¢80 million and profit before taxation is GH¢9 million. Subsequent to the year-end, a lawsuit was filed against Aseye Ltd. Below are the details of the lawsuit:

A key supplier of Aseye Ltd is suing the company for breach of contract. The lawsuit was filed on 10 October 2019, and the sum claimed by the supplier is GH¢2 million. This has been disclosed as a contingent liability in the notes to the financial statements; however, correspondence has just been received from the supplier indicating that they are willing to settle the case for a payment by Aseye Ltd of GH¢1 million. It is likely that the company will agree to this.

Required:
i) For the event above:

Discuss whether the financial statements require amendment. (2 marks)
Describe audit procedures that should be performed to enable the Auditor to draw a conclusion on the amendment. (2 marks)

ii) Describe the auditor’s responsibility for subsequent events occurring between:

The year-end date and the date the auditor’s report is signed. (3 marks)
The date the auditor’s report is signed and the date the financial statements are issued. (3 marks)

Answer

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Tags: Audit Procedures, Contingent Liability, IAS 37, ISA 560, Subsequent Events
Level: Level 2

Topic: Completion Procedures and Reporting
Series: APR 2022

Question Tag: IAS 37

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CR – Nov 2024 – L3 – Q3a – Share-Based Payment and Contingent Liabilities

Accounting for share-based payments and contingent liabilities in financial statements.

(i) Share-Based Payment

Required:

(ii) Contingent Liabilities and Share-Based Payment

Required:

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CR – Nov 2024 – L3 – Q2b – Accounting for Legal Claims

Assess and account for a legal claim against Agropah PLC under IAS 37.

Required:

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FR – Nov 2024 – L2 – Q2a – Provisions and Contingent Liabilities

Determining the correct accounting treatment for warranty obligations and legal provisions in Kamara LTD’s financial statements.

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CR – May 2016 – L3 – Q4b – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Discuss how the environmental liability for LALUPON Plc, arising from hazardous pollution, should be accounted for in its financial statements.

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CR – May 2021 – L3 – Q5b – Provisions, Contingent Liabilities, and Discounted Cash Flows (IAS 37)

Calculate provisions and charges for emission modifications in 2015 and 2016 for Gama Plastic Limited.

Required:

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CR – May 2021 – L3 – Q5a – Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)

Define provisions and discuss their misuse in creative accounting.

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CR – May 2023 – L3 – Q2a – Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)

Analyze Octopus Petroleum’s performance and ability to finance future oil spill costs

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CR – Nov 2023 – L3 – SC – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Evaluate Roman Limited's recognition of provision for emission reduction costs, compute the provision amounts, and explain the profit or loss components.

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AAA – Nov 2017 – L3 – Q5 – Audit Evidence

Evaluate XYZ Bank’s provision for litigation, discuss audit procedures per ISA 501, and prepare litigation disclosure for financial statements.

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FR – May 2017 – L2 – SB – Q7 – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Explain criteria for recognizing provisions, differentiate between provisions and contingent liabilities, and apply IAS 37 to specific company scenarios.

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FR – Nov 2019 – L2 – Q4b – Provisions, Contingent Liabilities and Contingent Assets (IAS 37)

Distinguish between provisions, contingent liabilities, and contingent assets as defined in IAS 37.

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FR – Dec 2022 – L2 – Q5b – Definition of Liability and Provisions

This question asks candidates to define liabilities and describe circumstances under which provisions should be recognized.

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FR – Mar/Jul 2020 – L2 – Q2b – Recognition of Provisions under IAS 37

Explain the recognition criteria for provisions in accordance with IAS 37, including situations when provisions should be recognized.

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FR – Mar/Jul 2020 – L2 – Q2c – Disclosure Requirements of IAS 37

Outline the disclosure requirements for provisions as per IAS 37.

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FR – Nov 2023 – L2 – Q2d – Financial Reporting Standards and Their Applications

Explain the financial reporting treatment of decommissioning costs in the financial statements of Taini Ltd under IAS 37.

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FR – July 2023 – L2 – Q2d – Contingent Liabilities and Assets (IAS 37)

Explanation of contingent liabilities and contingent assets according to IAS 37.

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AA – Mar 2023 – L2 – Q4a – Completion Procedures and Reporting

Explain the auditor's responsibilities regarding subsequent events and how a legal claim should be reported in financial statements.

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AA – Nov 2017 – L2 – Q5a – Audit and Assurance Risk Environment

Summary: Discuss the impact of an ongoing lawsuit on the audit report if the matter remains unresolved.

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AA – May 2021 – L2 – Q5b – Completion Procedures and Reporting

Discuss the impact of unresolved issues related to redundancy provision and contingent liability on the Auditor’s report.

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AA – April 2022 – L2 – Q4a – Completion Procedures and Reporting

Discusses the need to amend financial statements based on subsequent events and the auditor's responsibility in the post-year-end period.

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