- 5 Marks
Question
As a Trainee Financial Accountant working for Mulba LTD, a technology business, you have been asked by the Financial Controller to provide guidance on how to account for a variety of transactions that took place after the company’s fiscal year ended on December 31, 2023.
Mulba LTD was sued by a customer who was dissatisfied with the quality of a product delivered in June 2023. The court case was heard in late October 2023, but the judgment was delivered on 8 January 2024, ruling in favor of Mulba LTD. The ruling awarded the company legal costs of GH¢20,000 to cover solicitor’s fees.
The legal costs were paid by the customer to Mulba LTD on 12 January 2024.
Mulba LTD was doubtful of winning the case and had previously made a provision in its financial statements for the year ended 31 December 2023 as follows:
| Account | Debit (GH¢) | Credit (GH¢) |
|---|---|---|
| Legal Fees – Administrative Expenses | 25,000 | – |
| Cost of Sales | 35,000 | – |
| Provisions – Current Liabilities | – | 60,000 |
Required:
In accordance with IAS 10: Events after the Reporting Period, advise the management of Mulba LTD on the proper accounting treatment of the above issue to ensure that the financial statements are prepared in compliance with IFRS.
Answer
Accounting Treatment – IAS 10 (Events After the Reporting Period)
- The event occurred before the reporting date (December 31, 2023), but the judgment was delivered after the reporting period (January 8, 2024).
- Under IAS 10, the ruling confirms that the liability for legal costs was overstated, as Mulba LTD was not found liable.
- This ruling is considered an adjusting event because it provides additional evidence of conditions that existed at the reporting date.
Accounting Adjustments:
-
Reversal of Provision:
- Since the company was not liable, the previously recognized provision must be reversed.
Journal Entry:
Account Debit (GH¢) Credit (GH¢) Provisions – Current Liabilities 60,000 – Administrative Expenses (Reversal of Legal Fees) – 25,000 Cost of Sales (Reversal of Expected Compensation) – 35,000 -
Recognition of Compensation for Legal Fees (GH¢20,000):
- The legal costs awarded by the court (GH¢20,000) should be recognized as income in the financial statements.
- Since the customer paid the amount on 12 January 2024, it will be recorded as a receivable as at 31 December 2023.
Journal Entry:
Account Debit (GH¢) Credit (GH¢) Trade Receivables 20,000 – Other Income (Compensation from Court Ruling) – 20,000
Final Accounting Treatment in the 2023 Financial Statements:
- The provision is reversed, ensuring that the financial statements reflect the true legal position as at December 31, 2023.
- The GH¢20,000 compensation is recognized as income, ensuring proper financial presentation.
Conclusion:
The court ruling is an adjusting event, and Mulba LTD should reverse the provision and recognize the compensation in its 2023 financial statements in compliance with IAS 10: Events After the Reporting Period.
- Topic: Events After the Reporting Period (IAS 10)
- Series: Nov 2024
- Uploader: Salamat Hamid