(Total 20 marks) QUESTION 3 Abebio Limited is a listed company with a year end of 31 December 2019. A director of the company has a number of questions relating to the application of International Financial Reporting Standards (IFRS Standards) in its financial statements for the year ended 31 December 2019. The questions appear in notes 1-3. Note 1 - Pending legal cases At a recent board meeting, we discussed legal cases which customers A and B are bringing against Abebio in respect of the supply of products which were allegedly faulty. We supplied the goods in the last three months of the financial year. We have reliably estimated that if the actions succeed, we are likely to have to pay out GHS10 million in damages to customer A and GHS8 million in damages to customer B. Also, Abebio's legal advisers have reliably estimated that there is a 60% chance that customer A's claim will be successful and a 25% chance that customer B's claim will be successful. I know we have insurance in place to cover us against claims like this. It is highly probable that any claims which were successful would be covered under our policy. Therefore, I would have expected to see a provision for legal claims based on the likelihood of the claims succeeding. However, I would also have expected to see an equivalent asset in respect of amounts recoverable from the insurance company. The financial statements do contain a provision for GHS10 million but no equivalent asset. Disclosure of the information relating to both of the claims and the associated insurance is made in the notes to the financial statements. Required: Given the above facts, discuss the correct accounting treatment of the pending legal cases. (8 marks) (Total 20 marks) QUESTION 3 Abebio Limited is a listed company with a year end of 31 December 2019. A director of the company has a number of questions relating to the application of International Financial Reporting Standards (IFRS Standards) in its financial statements for the year ended 31 December 2019. The questions appear in notes 1-3. Note 1 - Pending legal cases At a recent board meeting, we discussed legal cases which customers A and B are bringing against Abebio in respect of the supply of products which were allegedly faulty. We supplied the goods in the last three months of the financial year. We have reliably estimated that if the actions succeed, we are likely to have to pay out GHS10 million in damages to customer A and GHS8 million in damages to customer B. Also, Abebio's legal advisers have reliably estimated that there is a 60% chance that customer A's claim will be successful and a 25% chance that customer B's claim will be successful. I know we have insurance in place to cover us against claims like this. It is highly probable that any claims which were successful would be covered under our policy. Therefore, I would have expected to see a provision for legal claims based on the likelihood of the claims succeeding. However, I would also have expected to see an equivalent asset in respect of amounts recoverable from the insurance company. The financial statements do contain a provision for GHS10 million but no equivalent asset. Disclosure of the information relating to both of the claims and the associated insurance is made in the notes to the financial statements. Required: Given the above facts, discuss the correct accounting treatment of the pending legal cases. (8 marks)
