CASE STUDY

Surgimed Ghana Ltd. operates in the medical supply industry and specializes in sales and installation of medical equipment and devices such as hospital furniture, medical equipment, electronic equipment, local area networking with a station monitoring and general telecom networking. The company is noted for installation of Sterilization Units, X-Ray machines and Ultrasound scanners, Installation of Medical Gas Pipe Lines and Operation Theater Requirements around the country. At the end of the 2020 financial year, the directors of the company were not sure whether they have treated the following transactions in their financial statements ending 31st December, 2020 correctly.

Transaction B

Surgimed Ghana Ltd. imports medical equipment which is manufactured under a patent. It subsequently adapts the equipment to fit the market in its jurisdiction and sells the equipment under its own brand name. Surgimed Ghana Ltd. originally spent GH8 million in developing the know- how required to adapt the equipment and, in addition, it costs around GH80,000 to adapt each piece of equipment. Surgimed Ghana Ltd. has capitalised the cost of the know-how and also the cost of the adaptation of each piece of equipment sold, as patent rights.

Surgimed Ghana Ltd. is being sued for patent infringement by Biotech Ltd., the owner of the original patent, on the grounds that Surgimed Ghana Ltd. has not materially changed the original product by its subsequent adaptation. If Biotech Ltd. is able to prove infringement, the court is likely to order Surgimed Ghana Ltd. to pay damages and to stop infringing its patent. Surgimed Ghana Ltd. lawyers feel that the court could conclude that Biotech Ltd. patent claim is not valid.

Biotech Ltd. has sued Surgimed Ghana Ltd. for GH6 million for the use of a specific patent and an additional GH2 million for lost profit due to Surgimed Ghana Ltd. being a competitor in the market for this product. Surgimed Ghana Ltd. has offered GH6 million to settle both claims but has not received a response from Biotech Ltd. As a result, Surgimed Ghana Ltd. feels that the damages which it faces will be between the amount offered by Surgimed Ghana Ltd. and the amount claimed by Biotech Ltd.

Required

The directors of Surgimed Ghana Ltd. would like you to advise them as to whether they have correctly accounted for the costs of the adaptation of the equipment.

Do you think the company should make a provision for the potential damages in the above legal case, in their financial statements for the year ended 31st December, 2020?