QUESTION 1 [10 MARKS] A former employee is suing your organisation for R10-million, claiming theft of intellectual property. On the advice of the companys legal representatives, a decision is made to provide for the amount of the claim in its financial statements, since it is probable that judgment will be in favour of the plaintiff. The company wishes to present this matter fairly in its financial statements, and approaches you, as a seasoned accounting expert, for guidance.

1.1 Which elements of the financial statements (if any) are involved? (5)

1.2 What are the recognition criteria for liabilities and expenses? (3)

1.3 Does the liability and expense in this instance meet the recognition criteria you have stated in your responses to 1.1 and 1.2, and how should this event be treated in the financial statements?