Provisions – Knowsia

FR – L2 – Q68 – Events After the Reporting Period

Explain adjusting and non-adjusting events with three examples each per IAS 10.

Question

(a) Explain the terms “adjusting events” and “non-adjusting events” and give three examples of each

(b) Yamfo Retail Limited, a chain of departmental stores has distributed its operations into four Divisions i.e. Food, Furniture, Clothing and Household Appliances. The following information has been extracted from the records:
(i) The company allows the dissatisfied customers to return the goods within 30 days. It is estimated that 5% of the sales made in June 20X4 will be refunded in July 20X4.
(ii) On June 2, 20X4, three employees were seriously injured as a result of a fire at the company’s warehouse. They have lodged claims seeking damages of GH¢2.0 million from the company. The company’s lawyers have advised that it is probable that the court may award compensation of GH¢400,000.
(iii) Under a new legislation, the company is required to fit smoke detectors at all the stores by December 31, 20X4. The company has not yet installed the smoke detectors.
(iv) On June 20, 20X4, the board of directors decided to close down the Household Appliances Division. However, the decision was made public after June 30, 20X4.
(v) The company has a large warehouse in Kumasi which was acquired under a three-year rent agreement signed on April 1, 20X3. The agreement is non-cancellable and the company cannot sub-let the warehouse. However, due to operational difficulties, the company shifted the warehouse to a new location.
(vi) A 15% cash dividend was declared on July 5, 20X4.

Required
Describe how each of the above issue should be dealt with in the financial statements for the year ended June 30, 20X4. Support your point of view in the light of relevant International Accounting Standards.

Answer

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Tags: Adjusting Events, Financial Statements, IAS 10, IAS 37, Non-Adjusting Events, Provisions, Retail Operations
Level: Level 2

Topic: and Contingent Assets (IAS 37)

FR – L2 – Q47 – Provisions and Contingencies

Advise on accounting for an insurance claim with a debit balance and potential additional payment.

Question

ACCOUNTING TREATMENT
You have been asked to advise on the appropriate accounting treatment for the following situations arising in the books of various companies. The year end in each case can be taken as 31 December 20X4 and you should assume that the amounts involved are material in each case.
(a) At the year-end there was a debit balance in the books of a company for GH¢15,000, representing an estimate of the amount receivable from an insurance company for an accident claim. In February 20X5, before the directors had agreed the final draft of the published accounts, correspondence with lawyers indicated that GH¢18,600 might be payable on certain conditions.
(b) A company has an item of equipment which cost GH¢400,000 in 20W8 and was expected to last for ten years. At the beginning of the 20X4 financial year the book value was GH¢280,000. It is now thought that the company will soon cease to make the product for which the equipment was specifically purchased. Its recoverable amount is only GH¢80,000 at 31 December 20X4.
(c) On 30 November, a company entered into a legal action defending a claim for supplying faulty machinery. The company’s solicitors advise that there is a 20% probability that the claim will succeed. The amount of the claim is GH¢500,000.
(d) An item has been produced at a manufacturing cost of GH¢1,800 against a customer’s order at an agreed price of GH¢2,300. The item was in inventory at the year-end awaiting delivery instructions. In January 20X5 the customer was declared bankrupt and the most reasonable course of action seems to be to make a modification to the unit, costing approximately GH¢300, which is expected to make it marketable with other customers at a price of about GH¢1,900.
(e) At 31 December, a company has a total potential liability of GH¢1,000,400 for warranty work on contracts. Past experience shows that 10% of these costs are likely to be incurred, that 30% may be incurred but that the remaining 60% is highly unlikely to be incurred.

Required
For each of the above situations outline the accounting treatment you would recommend and give the reasoning of principles involved. The accounting treatment should refer to entries in the books and/or the year-end financial statements as appropriate.

Answer

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Tags: Contingent Liabilities, Financial Statements, IAS 16, IAS 2, IAS 37, Impairment, Inventories, Legal Claims, Provisions, Warranty
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q45 – Provisions

Explain the accounting treatment for litigation, unfair dismissal, returns, and division closure in Kumasi Ltd's financial statements for 20X4.

Question

Kumasi Ltd is preparing its financial statements for the year ended 30 September 20X4. The following matters are all outstanding at the year end.
(1) Kumasi Ltd is facing litigation for damages from a customer for the supply of faulty goods on 1 September 20X4. The claim, which is for GH¢500,000, was received on 15 October 20X4. Kumasi Ltd’s legal advisors consider that Kumasi Ltd is liable and that it is likely that this claim will succeed. On 25 October 20X4 Kumasi Ltd sent a counter-claim to its suppliers for GH¢400,000. Kumasi Ltd’s legal advisors are unsure whether or not this claim will succeed.
(2) Kumasi Ltd’s sales director, who was dismissed on 15 September, has lodged a claim for GH¢100,000 for unfair dismissal. Kumasi Ltd’s legal advisors believe that there is no case to answer and therefore think it is unlikely that this claim will succeed.
(3) Although Kumasi Ltd has no legal obligation to do so, it has habitually operated a policy of allowing customers to return goods within 28 days, even where those goods are not faulty. Kumasi Ltd estimates that such returns usually amount to 1% of sales. Sales in September 20X4 were GH¢400,000. By the end of October 20X4, prior to the drafting of the financial statements, goods sold in September for GH¢3,500 had been returned.
(4) On 15 September 20X4 Kumasi Ltd announced in the press that it is to close one of its divisions in January 20X5. A detailed closure plan is in place and the costs of closure are reliably estimated at GH¢300,000, including GH¢50,000 for staff relocation.

Required
State, with reasons, how the above should be treated in Kumasi Ltd’s financial statements for the year ended 30 September 20X4

Answer

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Tags: Contingent Liabilities, Financial Statements, IAS 37, Litigation, Provisions, Restructuring, Returns
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q44 – Provisions

Explain accounting treatment for decommissioning costs of a mining site under IAS 37, including calculations.

Question

The following information relates to the financial statements of Kumasi Ltd for the year to 31 March 20X4.

The mining division of Kumasi Ltd has a 3 year operating licence from an overseas government. This allows it to mine and extract copper from a particular site. When the licence began on 1 April 20X3, Kumasi Ltd started to build on the site. The cost of the construction was GH¢500,000.

The overseas country has no particular environmental decommissioning laws. In response to the global sustainability agenda, Kumasi Ltd has developed its own policy for sustainable operations. It has made information about this policy public and has provided examples to demonstrate that it is a responsible company that believes in restoring mining sites at the end of the extraction period. The cost of removing the construction at the end of the three years is estimated to be GH¢100,000.

The cost of the site currently shown in the trial balance is GH¢500,000. The company has a cost of borrowing of 10%.

Required

Explain the correct accounting treatment for the above (with calculations if appropriate).

Answer

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Tags: Decommissioning Costs, Financial Reporting, IAS 37, Non-current Assets, Provisions, Sustainability
Level: Level 2

Topic: Provisions

PSAF – L2 – Q9.4 – Provisions and Contingent Liabilities

Account for contract cancellation, court ruling, and revised contract costs under IPSAS 19, including provisions and disclosures.

Question

Under IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets, the authority needs to account for the cancellation of contracts, the legal case, the court’s decision, and the potential revision of the contract amount.

Required:

Determine whether provisions should be made for the court award and contract revision, calculate the expected value of the revised contract amount, and outline the disclosures required under IPSAS 19.

Answer

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Tags: Contingent Liabilities, Contract Adjustments, Court Ruling, Disclosures, Expected value, Financial Reporting, IPSAS 19, Legal Obligations, Provisions, Public Sector
Level: Level 2

Topic: International Public Sector Accounting Standards

PSAF – L2 – Q8.1 – International Public Sector Accounting Standards

Detail the accounting treatment of outstanding tax revenue for the Federal Government of Nigeria as at 31st December 2024.

Question

As at 31st December 2024, corporate tax assessments amounting to NGN170 million were still outstanding to be paid by corporate entities to the Federal Government of Nigeria, whilst the total amount owed to the Federal Government of Nigeria as at 31st December 2024 in respect of taxes on goods and services stood at NGN140 million. It is estimated that, only 85% and 90% of the outstanding corporate taxes and taxes on goods and services respectively may be recovered.

Required:

Detail out the accounting treatment of tax revenue for the year ended 31st December 2024.

Answer

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Tags: Financial Performance, IPSAS 23, Non-Exchange Transactions, Provisions, Receivables, Tax Revenue, Uncollectible Revenue
Level: Level 2

Topic: International Public Sector Accounting Standards

AAA – L3 – Q38 – Evaluation and review

Plan audit of Belmont Pharmaceuticals for 31 Dec 20X8, addressing drug development, legal claim, and voucher revenue issues.

Question

Belmont Pharmaceuticals, a public limited liability company, is a pharmaceutical company which concentrates on medical research and the production of new medicines and remedies designed to improve the quality of life, for all ages. You are an audit manager who is planning the audit of Belmont Pharmaceuticals for the year ended 31 December 20X8. Profit before tax for the year ended 31 December 20X8 is C3.46m.
In the course of planning discussions with the finance director of Belmont Pharmaceuticals, he raised the following issues that have affected the financial statements of Belmont Pharmaceuticals for the year:
(a) During the year ended 31 December 20X8, Belmont Pharmaceuticals spent C8m on researching the relationship between two chemicals. As a result of the research, Belmont Pharmaceuticals identified a new drug that discourages the growth of carcinogenic cells in the body. It stimulates the production of antibodies in the white blood cells of the body’s immune system. Substantial progress has been made in the development of the drug and it is hoped that a drug for a cancer antidote may be possible in the foreseeable future. During the year C15 million has been spent on the project to develop this drug, codenamed project ‘Horizon’. The directors of Belmont Pharmaceuticals have capitalised the costs of C15 million as an intangible non-current asset.
(b) On 30 November 20X7, Belmont Pharmaceuticals received notification from its lawyers of a claim from users of a new type of asthma tablet. At 31 December 20X7, neither the likelihood of the success of the claim nor the amount were known and as a result, no provision was made in the financial statements for the year ended 31 December 20X7. As at 31 December 20X8, the case is still in progress, but the lawyers now advise Belmont Pharmaceuticals that the amount of the claim is an estimated C20 million and that the claimants are very likely to be successful in court.
(c) This year, just prior to the year end, Belmont Pharmaceuticals launched a DIY ‘Check the health of your blood’ voucher, marketing it as ‘a perfect choice…the gift of ensuring life longevity’. Belmont Pharmaceuticals will launch the product on a ‘2 for the price of 1’ basis and launch will be timed for Valentine’s Day on 14 February 20X5. Previous schemes on health schemes vouchers have proved immensely popular previously. The directors will issue C5 million vouchers and they expect an 80% take. Accordingly, the directors have included C4 million in revenue in the year to be December 20X8.

Required
For each of the above issues:
(i) Comment on the matters you should consider; and
(ii) State the audit evidence that you should expect to find, in undertaking planning of the audit working papers and financial statements of Belmont Pharmaceuticals.

Answer

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Tags: Audit Evidence, Intangible assets, Provisions, Revenue Recognition, Subsequent events
Level: Level 3

Topic: Evaluation and review

AAA – L3 – Q37 – Evaluation and review

Review subsequent events at Benson Manufacturing for 30 June 20X8, including redundancy, receivables, legal claims, and inventory loss.

Question

You are the manager in charge of the audit of Benson Manufacturing. Your subsequent events review for the year ended 30 June 20X8 has identified the following events, all of which took place after the date of the financial statements:
(1) A third of the sales force was made redundant. Provision has been made in the financial statements for the year ended 30 June 20X8 for redundancy payments of C500,000.
(2) One of Benson Manufacturing’s largest customers, Venture Retail, notified its intention to go into liquidation with an outstanding receivable of C250,000. The directors consider that the current general provision for irrecoverable receivables will cover any potential loss.
(3) A writ has been issued against the company by a former sales director who is claiming C120,000 for breach of his service agreement following his dismissal during the year ended 30 June 20X8. No provision has been made in the financial statements for the year ended 30 June 20X8 in respect of this claim.
(4) A fire at the company’s warehouse destroyed its entire inventory. The inventories had a book value of C2 million. This loss has not been included in the financial statements for the year ended 30 June 20X8.

Required
State the enquiries you would make and the evidence you would seek in order to reach a conclusion on the accounting treatment of the above in the financial statements for the year ended 30 June 20X8.

Answer

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Tags: Audit Evidence, Contingencies, Financial Statements, Inventory, Provisions, Receivables, Subsequent events
Level: Level 3

Topic: Evaluation and review

AAA – L3 – Q27 – Audit Evidence

Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

Question

Asante Motors (AM) sells motor vehicles and spare parts, and also provides servicing and repairs for vehicles. It operates from eight locations, having expanded recently from just four locations. Each location has a showroom for new and used automobiles, a store for spare parts and a service workshop.

Many of the second-hand vehicles sold by AM are vehicles that have been traded in by customers in part-exchange for a new or newer vehicle. Many used cars are sold for cash.

New cars are imported from a single supplier and are delivered on consignment. AM pays the agreed purchase price plus 2.5% interest four months after delivery. AM has a legal right to return unsold cars to the supplier, but in practice never does so.

New cars are sold with a two-year warranty from the supplier and used cars are sold by AM with a one-year guarantee. All repairs under warranty or guarantee are carried out by AM in its service workshops.

Each location carries a large amount of spare parts in its parts workshops. These operate under the brand name ‘StrongSpares’ and many parts are actually labelled with the StrongSpares brand name. A perpetual inventory system is used, and storekeepers continually check inventories of parts.

The car service workshops try to complete all jobs on the same day that they are started, and are successful in about 80% of cases. Jobs are usually invoiced immediately after completion, and are usually paid for by customers when they come to collect their vehicle.

The senior sales representative at each location is able to use a new car, selected from each consignment delivered from the supplier. These cars are used for business purposes and as demonstration models. They are eventually sold second-hand as ex-demonstration models.

AM purchased the StrongSpares brand name for its parts stores. Senior management believe that the cost of the brand name should not be amortised because they consider that the asset has an indefinite useful life.

AM has recently established an internal audit function, although this has not yet done much work.

Required
Using the information provided, identify and explain the audit risks that will have to be considered and dealt with when planning the final audit of Asante Motors for the financial year just ending.

Answer

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Tags: Audit Risk, Consignment Inventory, Financial Statement Assertions, Going Concern, Internal Audit, Inventory, Provisions, Related Party Transactions, Retail Audit, Revenue Recognition
Level: Level 3

Topic: Audit Evidence, Planning

Tag (SQ): Provisions

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FR – L2 – Q68 – Events After the Reporting Period

Explain adjusting and non-adjusting events with three examples each per IAS 10.

FR – L2 – Q47 – Provisions and Contingencies

Advise on accounting for an insurance claim with a debit balance and potential additional payment.

FR – L2 – Q45 – Provisions

Explain the accounting treatment for litigation, unfair dismissal, returns, and division closure in Kumasi Ltd's financial statements for 20X4.

FR – L2 – Q44 – Provisions

Explain accounting treatment for decommissioning costs of a mining site under IAS 37, including calculations.

PSAF – L2 – Q9.4 – Provisions and Contingent Liabilities

Account for contract cancellation, court ruling, and revised contract costs under IPSAS 19, including provisions and disclosures.

PSAF – L2 – Q8.1 – International Public Sector Accounting Standards

Detail the accounting treatment of outstanding tax revenue for the Federal Government of Nigeria as at 31st December 2024.

AAA – L3 – Q38 – Evaluation and review

Plan audit of Belmont Pharmaceuticals for 31 Dec 20X8, addressing drug development, legal claim, and voucher revenue issues.

AAA – L3 – Q37 – Evaluation and review

Review subsequent events at Benson Manufacturing for 30 June 20X8, including redundancy, receivables, legal claims, and inventory loss.

AAA – L3 – Q27 – Audit Evidence

Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

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FR – L2 – Q68 – Events After the Reporting Period

Explain adjusting and non-adjusting events with three examples each per IAS 10.

You're reporting an error for "FR – L2 – Q68 – Events After the Reporting Period"

FR – L2 – Q47 – Provisions and Contingencies

Advise on accounting for an insurance claim with a debit balance and potential additional payment.

You're reporting an error for "FR – L2 – Q47 – Provisions and Contingencies"

FR – L2 – Q45 – Provisions

Explain the accounting treatment for litigation, unfair dismissal, returns, and division closure in Kumasi Ltd's financial statements for 20X4.

You're reporting an error for "FR – L2 – Q45 – Provisions"

FR – L2 – Q44 – Provisions

Explain accounting treatment for decommissioning costs of a mining site under IAS 37, including calculations.

You're reporting an error for "FR – L2 – Q44 – Provisions"

PSAF – L2 – Q9.4 – Provisions and Contingent Liabilities

Account for contract cancellation, court ruling, and revised contract costs under IPSAS 19, including provisions and disclosures.

You're reporting an error for "PSAF – L2 – Q9.4 – Provisions and Contingent Liabilities"

PSAF – L2 – Q8.1 – International Public Sector Accounting Standards

Detail the accounting treatment of outstanding tax revenue for the Federal Government of Nigeria as at 31st December 2024.

You're reporting an error for "PSAF – L2 – Q8.1 – International Public Sector Accounting Standards"

AAA – L3 – Q38 – Evaluation and review

Plan audit of Belmont Pharmaceuticals for 31 Dec 20X8, addressing drug development, legal claim, and voucher revenue issues.

You're reporting an error for "AAA – L3 – Q38 – Evaluation and review"

AAA – L3 – Q37 – Evaluation and review

Review subsequent events at Benson Manufacturing for 30 June 20X8, including redundancy, receivables, legal claims, and inventory loss.

You're reporting an error for "AAA – L3 – Q37 – Evaluation and review"

AAA – L3 – Q27 – Audit Evidence

Identify audit risks for Asante Motors, a multi-site car retailer with inventory and warranty issues.

You're reporting an error for "AAA – L3 – Q27 – Audit Evidence"

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