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 25 · IAS 10 Events after the Reporting Period
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:
If PharmaNova's board declares a final dividend for the 20X5 financial year on 15 February 20X6 (before the financial statements are authorized for issue), how should this be treated in the 31 December 20X5 Statement of Financial Position?
Answer options:
It should be recognized as a liability because it relates to the 20X5 financial year.
It should be recognized as a liability because it was declared before the financial statements were authorized for issue.
It should not be recognized as a liability, but disclosed in the notes.
It should be ignored completely in the 20X5 financial statements.
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