PROBLEM 3: CONTINGENCIES (20 marks)

SITUATION A:

Tesselek Technology, Inc., is a relatively new company and has been operating for only the past five years. It was set up by two leading scientists Mr. Tess and Mr. Lek. The company is involved in the development of high speed electric cars which are in high demand. The company has enjoyed very rapid growth and equally high profitability. Although the company has employed an excellent group of well competent employees, its overall future development plans were highly dependent on the two senior scientists.

On November 3, 2020, the two scientists had an accident in a race to test their new car model. Both were killed in that accident and now, the companys future plans have come to a near dead stop. The stock market answered badly to this news, the company stock price had dropped nearly by 70% and the remaining members of the Board of Directors have instructed the CFO to account for this loss of market value estimated at between $350M-$500M ( probability is equally distributed) as a contingent loss. The Board members argue that if a new expert is not found quickly, the company may have to be sold off or dissolved.

Instruction-

Determine the amount of the loss which could be written off assuming the company is using IFRS.

SITUATION B:

FastRacers is a company that organizes auto racing at various international metropolitan centers like Monaco, Montreal, etc. In July, 2020, there was a horrific crash at one of their races in Montreal. Many spectators have been injured and hospitalized during that accident. The company consulted some of the best experts right after the accident in order to determine the potential consequences from this incident. The majority legal opinion was the same; it is likely that the company would be held liable for significant damages. However, it has been almost four months and as yet not a single law suit has been filed. The company, based upon the legal advice it has received, estimates that the total losses could amount to as high as $45 million (M). In their investigations, the company reviewed losses for injuries from four previous incidents which were $750,000, 1.4M, $6.4M and $18M with estimated probabilities of occurrence being 5%, 35%, 40% and 20% respectively.

Instruction-

1. What the company should do under IFRS rules on December 31, 2020. Be sure to explain in reasonable detail the requirements specified by IFRS to deal with.

2. Assuming FastRacers follows ASPE and that the companys lawyers have estimated the loss in a range of $750,000 to $18M, and no specific amount in the range to be considered the best estimate. What amount if any should be reported as a liability for this contingency as at December 31, 2020.