QUESTION THREE

$[20]$

Kaas Limited purchased $1000$ litres of unpasteurised milk on $1$ October $2022$ for R$50000,$ half of which had been used in the production of long$-$life milk during October $2022$ and sold to supermarkets between October and November of $2022.$ The remaining $500$ litres was frozen for future use.

$1$

On $1$ December $2022,$ a consumer suffered serious food poisoning and alleged that it was caused by the long$-$life milk produced by Kaas Limited. This consumer took legal action against Kass over the poisoning.

Kaas Limited is not insured against the potential losses that may result from claims of this nature. Due to public interest, the case went to court almost immediately. Indications during the court proceedings, held in late December $2022$ were that Kaas Limited was probably responsible for poisoning and would probably be found guilty. It was found that the long$-$life milk was poisoned because the milk used in its manufacture had been contaminated. At $31$ December $2022$ it was too soon to be able to reliably estimate the settlement costs.

Due to the negative publicity arising from the court case, Kaas Limited decided not to plead against the inevitable 'guilty' verdict and to willingly pay all costs, in the interests of salvaging a positive public image.

The financial director is finalising the financial statements for the year ended $31$ December $2022$ and the board plan to authorise the financial statements for issue by mid$-$February $2023.$ The following events relating to the case are relevant and need to be considered:

a$)$ Warnings by the lawyers:

Kaas Limited has been unable to keep the case out of the media and their lawyers warned in December $2022$ that as soon as the verdict was published in the media, more similar cases will probably be brought against Kaas Limited by other aggrieved customers, although it was impossible to estimate the number of cases or their financial impact.

b$)$ Estimated settlement costs:

During January $2023,$ Kaas Limited's lawyers obtained further information that enabled them to estimate that the court would award the plaintiff R$250000$ whereas an out$-$of$-$court settlement would probably be R$220000.$

c$)$ Findings of specialists:

Specialists hired by Kaas Limited in January $2023,$ but before publishing the financial statements, confirmed that all of the $500$ litres of unpasteurised milk held in cold storage at year$-$end is also contaminated and must be destroyed.