Drira Inc.follows IFRS was served with a lawsuit for patent infringement during 2020 with a $3 million claim against them. Drira's lawyers believe there is a 30% chance they will have to pay $400,000 and 70% change of paying $1 million in 2021. Prior to considering this lawsuit effect, Drira has had horrible results in 2020 and no one will receive their bonus. Management wanted to be conservative and has accrued the full $3 million in the draft 2020 financial statements for the lawsuit.

Required: Use point form below to lay out your points relating to the following:

a) What is the issue here in relation to the 2020 financial statements?

b) What is your recommendation and why?

c) What is the effect of your recommendation on the draft 2020 financial statements as well as the 2021 financial statements? Any other concerns not already mentioned?

Note, it is not necessary to separate your response related to each letter as long as all questions above are answered in your response.