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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 24 · IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
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 the change in inventory valuation method be accounted for in the 20X5 financial statements?
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 the change in inventory valuation method be accounted for in the 20X5 financial statements?
Answer options:
It is a change in accounting estimate and must be applied prospectively.
It is a change in accounting policy and must be applied retrospectively.
It is a change in accounting policy and must be applied prospectively.
It is a prior period error and must be applied retrospectively.
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