Question 1

SECTION B

CASE SCENARIO: Quantum Logistics Group acquired 100% of the equity of a foreign subsidiary, Velocity Trans, on 1 January 20X9. Quantum paid $5,000,000 in cash and agreed to pay further contingent consideration in two years. The present value of this contingent consideration at acquisition was $1,000,000. At acquisition, Velocity Trans had an internally generated brand not recognized in its financial statements, with an estimated fair value of $2,000,000. The applicable tax rate is 20%. Velocity Trans is currently defending a legal claim from a customer. Quantum's legal team estimates a 60% probability of losing and paying $3,000,000, and a 40% probability of losing and paying $1,000,000. Velocity Trans's functional currency is the Dinar, while Quantum's is the Dollar.

QUESTION: What amount should be recognized as a provision for the legal claim in the consolidated financial statements at the acquisition date?

Accepted Answer

Determine if this is a single obligation or a large population of items. For a single obligation, use the 'most likely outcome' method under IAS 37.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Calculating the expected value (weighted average) of $2,200,000, which is only appropriate for a large population of items (like warranties).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 3

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