Abebio Limited is a listed company with a year end of 31 December 2019. A director of the company has a number of questions relating to the application of International Financial Reporting Standards (IFRS Standards) in its financial statements for the year ended 31 December 2019. The questions appear in notes 13.

Note 1 Pending legal cases

At a recent board meeting, we discussed legal cases which customers A and B are bringing against Abebio in respect of the supply of products which were allegedly faulty. We supplied the goods in the last three months of the financial year.

We have reliably estimated that if the actions succeed, we are likely to have to pay out GHS10 million in damages to customer A and GHS8 million in damages to customer B. Also, Abebios legal advisers have reliably estimated that there is a 60% chance that customer As claim will be successful and a 25% chance that customer Bs claim will be successful.

I know we have insurance in place to cover us against claims like this. It is highly probable that any claims which were successful would be covered under our policy. Therefore, I would have expected to see a provision for legal claims based on the likelihood of the claims succeeding. However, I would also have expected to see an equivalent asset in respect of amounts recoverable from the insurance company. The financial statements do contain a provision for GHS10 million but no equivalent asset. Disclosure of the information relating to both of the claims and the associated insurance is made in the notes to the financial statements.

Required:

Given the above facts, discuss the correct accounting treatment of the pending legal cases.

(8 marks)

Note 2 Non-current assets

When I look at the statement of financial position, one of the categories of non-current assets is investment properties and another category is property, plant and equipment in which all other properties are included. Surely, we invest in all our properties, so why do we have two categories for them in the statement of financial position? How do we decide what goes into property, plant and equipment and investment properties?

In addition, a note to the financial statements states that investment properties are measured at their fair values and not depreciated. Dont all non-current assets have to be depreciated over their estimated useful lives? Another note states that property included in property, plant and

3

equipment is measured at cost less accumulated depreciation rather than at fair value. Shouldnt all properties be measured in the financial statements on a consistent basis? Dont you think this is a clear violation of consistency concept?

Finally, I cant immediately see from the financial statements where the gains or losses relating to the measurement of investment properties are included. The profit statement seems to include two main components profit or loss and other comprehensive income. Where would the gains or losses go? Presumably, is the treatment of gains and losses the same for any non-current assets which are measured at fair value?

Required:

Given the above facts, discuss clearly what constitute property, plant and equipment and investment property. You are also required to explain the correct accounting treatment of revaluation gain and loss, and fair value gain and loss. (8 marks)

Note 3 Inventory

Abebio Limited is a retailer of Italian furniture and has five major product lines: sofas, dining tables, beds, closets, and lounge chairs. At December 31, 2019, quantity on hand, cost per unit, and net realizable value (NRV) per unit of the product lines are as follows:

Required:

Product line

Sofas

Dining tables Bed

Closets Lounge chairs

Quantity on hand

100

200

300

400

500

Cost per unit

GHS 1,000 500 1,500 750 250

NRV per unit

GHS 1,020 450 1,600 770 200

Compute the valuation of the inventory of Abebio Limited at December 31, 2019, under IAS 2 using the lower of cost and NRV principle.

QUESTION Abebio Limited is a listed company with a year end of 31 December 2019. A director of the company has a number of questions relating to the application of International Financial Reporting Sundards (IFRS Standard) in its financial statements for the year ended 31 December 2019. The questions appear in notes 1-3. Note 1 - Pending legal cas Ala recent board meeting, we discussed legal cases which customers A and B are bringing against Abebi in respect of the supply of products which were allegedly faulty. We supplied the goods in the last three months of the financial year We have reliably estimated that if the actions succeed, we are likely to have to pay out GHS10 million in damages to customer A and GHSS million in damages to customer B. Also, Abebio's legal advisers have reliably estimated that there is a 60% chance that customer A's claim will be successful and a 25% chance that customer B's claim will be successful I know we have insurance in place to cover us against claims like this. It is highly probable that any claims which were successful would be covered under our policy. Therefore, I would have expected to see a provision for legal claims twed on the likelihood of the claims according However, I would also have expected to see an equivalent asset in respect of amounts recoverable from the insurance company. The financial statements de contain a provision for GHS10 million but no equivalent asset. Disclosure of the information relating to both of the claims and the associated insurance is made in the notes to the financial statements Required: Given the above facts, disces the correct accounting treatment of the pending legal cases marks) Note 2 -Noncurrentes When I look at the statement of financial position, one of the categories of non-current assets is investment properties and another category is property, plant and equipment in which all other properties are included Surely, we invest in all our properties to why do we have two categories for them in the statement of financial position? How do we decide what goes into property, plant and equipment and investment properties"? In addition, a note to the financial statements states that investment properties are measured at their fair values and not depreciated. Don't all non-current assets have to be depreciated over their estimated useful lives? Another note states that property included in property, plant and 3 equipment is measured at cost less accumulated depreciation rather than at fair value Shouldn't all properties be measured in the financial statements on a consistent basis? Don't you think this is a clear violation of consistency concept? Finally. I can't immediately we from the financial statements where the gains or lowes relating to the measurement of investment properties are included. The profit statement seems to include two main components - prodit or loss and other comprehensive income. Where would the gains or losses go? Presumably, is the treatment of gains and losses the same for my non-current assets which are measured at fair value? Required Given the above facts, discuss clearly what constitute property, plant and equipment and investment property. You are also required to explain the correct accounting treatment of revaluation gain and loss, and fair value gain and low. (mark) GHS Note 3 - Inventory Abebis Limited is a retailer of Italian fumiture and has five major product lines sofas, dining tables, beds, closets and lounge chairs. Al December 31, 2019, quantity on hand cost per unit, and net realizable vale (NRV) per unit of the product lines are as follow Quantity Cost NRV Product line per alt Sofas Dining tables Bed 1.500 Closets 750 Lounge chains 500 250 200 Required: Compute the valuation of the inventory of Alchio Limited at December 31, 2019. under IAS 2 wing the lower of cost and NRV" principle. (Total 20 marks) 770