- 20 Marks
CR – Nov 2021 – L3 – Q4 – Provisions, Contingent Liabilities, and Contingent Assets (IAS 37)
Guidance on presenting litigation, lease contract, and brand valuation in Fidipote PLC’s financial statements.
Question
You are the Financial Controller of Fidipote PLC, a bottling company with diverse products. The accountant responsible for preparing the 2020 annual financial statements is considering the accounting treatment of the following and has approached you for guidance:
a. On December 31, 2020, Fidipote PLC has a litigation proceeding involving a customer claiming damages in the sum of ₦50 million because she had allegedly been injured when drinking one of the company’s products. She had claimed that the company bottled a sharp object inside the content of the product which she swallowed and had to be operated upon in order to remove the object. Fidipote PLC is disputing the claim, maintaining that any injury was due solely to negligence on the part of the customer. As at December 31, 2020, the case was yet to be decided.
(8 Marks)
b. Fidipote PLC signed a ten-year lease agreement on a property requiring an annual payment of ₦5 million in advance on January 1, 2016. The property was used over the years as a Cinema Hall. As a result of the COVID-19 pandemic and the lockdown during 2020, the consequent long closure of the hall made patronage of cinema shows financially unsustainable. Fidipote PLC discovered that it has no further use of the building. It is not possible to sub-lease the building to another tenant, and remodeling cannot be done due to certain provisions of the lease agreement. As at December 31, 2020, the present value cost of outstanding lease installments amounted to ₦22.5 million.
(6 Marks)
c. The Managing Director made a proposal that the Fidipote brand name is unique and of significant market persuasion and should, therefore, be included as an asset in the financial statements. Due diligence, including market research by a certified consultant, has been done on this proposal. A valuation of ₦250 million was determined to be included in the financial statements as at December 31, 2020.
(6 Marks)
Required:
Explain how the above information, a to c, should be presented in the financial statements of Fidipote PLC for the year ended December 31, 2020.
Find Related Questions by Tags, levels, etc.