You are Financial Accountant working in practice and have received the following email from a client Gayton Ltd. Gayton sell security surveillance equipment and are currently preparing their financial statements for the year ended 31 December 2021. Good morning, I have the following issues in my financial statements that I am unable to deal with. Can you please layout with a full explanation how these are to be accounted in line with International Financial Reporting Standards and why?

Sales of system with inclusive 24 hour monitoring.

On 1 June 2021 Gayton installed a large number of monitoring systems to a large retail customer. As part of the contract they also included 24 hour monitoring of these cameras for 3 years. The total amount charged was 450,000. The normal selling price of the equipment alone would be 220,000. The cost of providing this monitoring service for 3 years is expected to be 200,000, when Gayton sells this monitoring service separately it would generally charge 40% mark up.

Litigation from a customer

Gayton have received notice of legal action from a customer who lost 100,000 of inventory due to theft. They are blaming Gayton and taking us to court to extract compensation. Our solicitors think its unlikely but possible we would be found liable, if we were to be liable we would expect to have to pay 100,000 in compensation.

Closure of a factory

An announcement was made on 20 November 2021 we are closing our Scotland factory down on 31 March 2022 and some of the staff there redundant. We expect contractual redundancy costs to be 180,000 and for the staff we dont make redundant a cost of a further 85,000 for retraining and relocation. Also we have to pay our cleaning company a fee of 5,000 per month until the contract expires on 30 September 2022.

Change in depreciation method

There is a piece of machinery we currently hold which we bought for 50,000 on 1 January 2019 and we were depreciating straight line over a 10 year life expecting a residual value of 2,000 scrap. However its transpired the machinery needs increasing maintenance with age and it was decided on 1 January 2021 to change the depreciation method to 20% reducing balance, although no entries have been made in the current year.

Requirement

Respond to the clients email discussing the accounting treatment of these items and they impact they would have on the financial statements in the year ended 31 December 2021