Section B - Case 2
PharmaNova is a pharmaceutical company with a financial year end of 31 December 20X5.
On 15 December 20X5, a patient filed a lawsuit against PharmaNova for $2 million, claiming side effects from a drug. Legal counsel advises there is a 60% probability PharmaNova will lose the case and have to pay the full $2 million.
On 28 December 20X5, the board decided to close a research facility. A detailed formal plan was drawn up, but it was not communicated to the affected employees until 5 January 20X6. The estimated closure costs are $500,000.
On 10 January 20X6, a major wholesale customer went bankrupt. The customer owed PharmaNova $300,000 at 31 December 20X5.
On 1 February 20X6, PharmaNova decided to change its inventory valuation method from FIFO to Weighted Average to better reflect its business model.
Question:
How should PharmaNova account for the lawsuit in its financial statements for the year ended 31 December 20X5?
ACCA · Question 22 · IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Section B - Case 2
PharmaNova is a pharmaceutical company with a financial year end of 31 December 20X5.
On 15 December 20X5, a patient filed a lawsuit against PharmaNova for $2 million, claiming side effects from a drug. Legal counsel advises there is a 60% probability PharmaNova will lose the case and have to pay the full $2 million.
On 28 December 20X5, the board decided to close a research facility. A detailed formal plan was drawn up, but it was not communicated to the affected employees until 5 January 20X6. The estimated closure costs are $500,000.
On 10 January 20X6, a major wholesale customer went bankrupt. The customer owed PharmaNova $300,000 at 31 December 20X5.
On 1 February 20X6, PharmaNova decided to change its inventory valuation method from FIFO to Weighted Average to better reflect its business model.
Question:
What is the correct accounting treatment for the research facility closure costs in the financial statements for the year ended 31 December 20X5?
Answer options:
Recognize a provision for $500,000.
No provision is recognized, but disclosure may be required as a non-adjusting event.
Recognize a provision for $500,000 because the board decision was made before year-end.
Recognize a contingent liability of $500,000.
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