(1) Litigation for damages
Under IAS 37, a provision should only be recognised when:

• an entity has a present obligation as a result of a past event;
• it is probable that an outflow of economic benefits will be required to settle the obligation; and
• a reliable estimate can be made of the amount of the obligation.

Applying this to the facts given:

• Kumasi Ltd’s legal advisors have confirmed that there is a legal obligation. This arose from the past event of the sale, on 1 September 20X4 (i.e. before the year-end).
• Probable is defined as ‘more likely than not’. The legal advisors have confirmed that it is likely that the claim will succeed.
• A reliable estimate of GH¢500,000 has been made.
  Therefore a provision of GH¢500,000 should be made.

Counter-claim
IAS 37 requires that such a reimbursement should only be recognised where receipt is ‘virtually certain’. Since the legal advisors are unsure whether this claim will succeed no asset should be recognised in respect of this claim.

(2) Claim for unfair dismissal
In this case, the legal advisers believe that success is unlikely (i.e. possible rather than probable). Therefore this claim meets the IAS 37 definition of a contingent liability:

• a possible obligation;
• arising from past events;
• whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
  The liability is a possible one, which will be determined by a future court case or tribunal. It did arise from past events (the dismissal had taken place by the year-end).
  This contingent liability should be disclosed in the financial statements (unless the legal advisors believe that the possibility of success is in fact remote, and then no disclosure is necessary).

(3) Returns
Applying the IAS 37 conditions in (1) to the facts given:

• Although there is no legal obligation, a constructive obligation arises from Kumasi Ltd’s past actions. Kumasi Ltd has created an expectation in its customers that such refunds will be given.
• As at the year-end, based on past experience, an outflow of economic benefits is probable.
• A reliable estimate can be made. This could be 1% × 400,000 but since the returns are now all in the actual figure of GH¢3,500 can be used.
  Therefore a provision of GH¢3,500 should be made.

(4) Closure of division
Applying the above IAS 37 conditions in (1) to the facts given:

• A present obligation exists because at the year-end there is a detailed plan in place and the closure has been announced in the press.
• An outflow of economic benefits is probable.
• A reliable estimate of GH¢300,000 has been made.
  However, IAS 37 specifically states in respect of restructuring that any provision should include only direct expenses, not ongoing expenses such as staff relocation or retraining. Therefore a provision of GH¢250,000 (300,000 – 50,000) should be made.