Phica operates in the medical supply industry importing medical equipment which is manufactured under a patent. It adapts the equipment to fit the market in its jurisdiction and sells the equipment under its own brand name. Information relating to transactions undertaken by Phica in the financial year ended 30 November 2021 is given in the following paragraphs:

Phica spent $3 million on developing the technology for the process used to adapt the imported medical equipment and, in addition, it costs around $50000 to adapt each of equipment before it can be sold. Phica has capitalised the cost of the development of the technology and the cost of the adaptation of each piece of equipment sold, as patent rights.

Phica is being sued for patent infringement by Cosine, the owner of the original patent, on the grounds that Phica has not materially changed the original product by its subsequent adaptation. If Cosine can prove infringement, the court is likely to order Phica to pay damages and to stop infringing its patent. Phica's lawyers feel that the court could conclude that Cosine's patent claim is not valid. Cosine has sued Phica for $5 million for the use of a specific patent and an additional $8 million for lost profit due to Phica being a competitor in the market for this product. Phica has offered $7 million to settle both claims but has not received a response from Cosine. As a result, Phica feels that the damages which it faces will be between the amount offered by Phica and the amount claimed by Cosine.

Required:

Advise the directors of Phica as to whether they have correctly accounted for the costs of the adaptation of the equipment and whether they should make a provision for the potential damages in the legal case in the financial statements for the year ended 30 November 2021. (9 marks).

Please use necessary calculation with Dr/Cr (if necessary) and IAS/IFRS.