Question 1: Application of NZ IFRS 25 Marks

Part A

Fire Ltd, a North Island electronics supplies business, has provided the following information to be considered in relation to the financial statements for the year ended 31 March 2020. The financial statements were authorised on 30 May 2020 by the directors.

REQUIRED Consider following each situation separately and explain how the situations would affect the annual financial statements for Fire Ltd for the year ended 31st March 2020. Describe what would be required to be reported and indicate where authoritative support can be gained from the financial reporting standards to support your decisions (Show necessary calculations where required).

(i) On 30 April 2020, the Department of Occupational Health and Safety charged the company over unsafe practices that resulted in the leakage of toxic materials into the Tasman Sea. The leakage occurred on 10 March 2020. Lawyers are of the opinion that the company is very likely to be found negligent by the court. Legal advice has indicated that the company is likely to have to pay a fine of $400,000 plus legal and clean-up costs of $200,000. [6 marks]

(ii) A major debtor owing $45,000 to Fire Ltd has gone into liquidation in the month of March 2020. This information became available to Fire Ltd on 3rd May 2020. $4,500 of provision as an allowance for doubtful debts had been made on this debtor by 31st March 2020. Correspondence has been received from the liquidator indicating that the expected pay-out will be no more than $9,000. [5 marks]

(iii) On 21 May 2020, a fire destroyed goods stored at one of the companys warehouses, resulting in damages of $200,000. Insurance will cover $120,000 of the damages, but payment of the insurance claim has been delayed by a police investigation.