Your managing director is having a polite disagreement with the auditors on the subject of accounting for contingencies. Since the finance director is absent on sick leave, he has come to you for advice. It appears that your firm is involved in four unrelated legal cases: P, Q, R and S. In case P the firm is suing for £10,000, in case Q the firm is suing for £20,000, in case R the firm is being sued for £30,000 and in case S the firm is being sued for £40,000. The firm has been advised by its expert and expensive lawyers that the chances of the firm winning each case are as follows:
Case Percentage likelihood of winning
P..........................8
Q........................92
R.........................8
S.........................92
Required
Write a memorandum to the managing director that:
1. explains why IAS 37 is relevant to these situations;
2. States the required accounting treatment for each of the four cases in the published financial statements;
3. Gives journal entries for any necessary adjustments in the double-entry records;
4. Suggests the contents of any Notes to the Financial Statements that are required by the IAS;
5. Briefly discusses whether IAS 37 leads to a satisfactory representation of the position.