QUESTION ONE [20]

Fresh Limited, a manufacturer of toothpaste, was taken to court over alleged defamation charges when the company accused a rival toothpaste manufacturer of fraud. Before yearend (31 December 2020), the lawyers of Fresh Limited advised that, although losing the case was unlikely, legal fees and settlement costs could amount to R900 000 in the event that the court case was lost. On 4 February 2020, the judge presiding over the case ruled that Fresh should pay R1 000 000 to the plaintiff as well as pay all of the plaintiffs legal fees, which amounted to R180 000. The financial statements had not yet been authorised for issue at the time of the court ruling. Required: Discuss how this information should be treated in the financial statements of Fresh Limited for the year ended 31 December 2020. Include all relevant definitions.