Question

200 Sleech Ltd operates an information systems company. The firm is preparing its 30 June financial statements, and requires advice concerning the proper treatment of the following situations. Explain how to deal with each situation, and prepare any required journal entries 1. Sleech Ltd owns a research laboratory which is uninsurable because of the high risk of competitor spying, and poor security systems. Based on previous experience, management firmly believes that a loss of information systems designs will occur during the year. The average loss per year over the last five years has been $500 000. The company self-insures via an appropriation of retained profits. 2. Ms Shazlick, a key manager of the organisation, is currently contracted to receive incentive payments on the basis of share price movements for the firm. During the year, Sleech Ltd has won some key tenders, and the share price has doubled, meaning that Ms Shazlick has earned shares with a market value of $500 000 for the year just ended. 3. The Freight Transport Union has threatened 14-day national strike action unless certain of its wages demands with another company are met. Negotiations have terminated, and it is expected that the union will strike during February the following year. It is estimated that a strike of 10 days would cause losses of earnings of approximately $1 000 000 because of loss of supply and delivery facilities. 4. During the year, Sleech Ltd completed a contract for Danlon Ltd and Dolland Ltd, organisations collaborating in the development of information systems to enable communications in remote cold locations. Sleech Ltd auditors have uncovered what appears to be overcharging on one invoice. Sleech Ltd is of the opinion that its clients will demand a refund of $75 000. 5. The finance minister of a foreign country in which one of its subsidiaries is located, T.G. Cee, has informed Sleech Ltd of her government's intention to expropriate funds from the subsidiary.T.G. Cee indicates that the best outcome Sleech Ltd could expect is to receive 60 per cent of the fair value of the subsidiary's property as settlement. The carrying amount of the (wholly owned) subsidiary is $12 900 000 and the estimated fair value is $15 000 000.

Answer 1

1)

IAS 37 Provisions, Contingent Liabilities, and Contingent Assets :

Paragraph.14 (a) :

A provision shall be recognized when:

(a) an entity has a present obligation ( legal or constructive) as a result of a past event;

Paragraph.10 :

A constructive obligation is an obligation that derives from an entity’s actions where:

(a) by an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities; and

(b) as a result, the entity has created a valid expectation on the part of those other parties that it will discharge those responsibilities.

Here Sleech Ltd has past experience of incurring $ 500000 every year on the part of loss arising on weak information system design which is probable in the current year also. Therefore it is a form of constructive obligation.

Sleech Ltd Should recognize a provision for an amount of $ 500000 in the current year:

Journal entry for recognition of Provision
Date	Particulars		Debit ( $ )	Credit ( $ )
30-Jun	Profit and Loss A/C	Dr	5,00,000
	Provision for loss of information system design A/C			5,00,000
	Being Provision created for probable loss.

2) IFRS 2: Share-Based Payments :

Paragraph.7:

An entity shall recognize the goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received.

Paragraph.8:

When the goods or services received or acquired in a share-based payment transaction do not qualify for recognition as assets, they shall be recognized as expenses.

Date	Particulars		Debit ( $ )	Credit ( $ )
30-Jun	Key manager Services/Remuration A/C	Dr	$5,00,000
	Equity A/C			$5,00,000
	Being Shares issued under contract to Key manager is recognised

3)

IAS 37 Provisions, Contingent Liabilities, and Contingent Assets :

Paragraph.10

A contingent liability is:

(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity

Therefore the company should disclose contingent liability in the notes to accounts for $1400000

4) Company shall recognize the expected refund amount as liability and shall also restate the turnover by debiting the sales A/C

Date	Particulars		Debit	Credit
30-Jun	Sales A/C	Dr	$75,000
	Danlon Ltd			$75,000
	Dolland Ltd
	Being adjustment made for Overcharged invoice