Adonko Ltd is a listed Ghanaian company which reports under International Financial Reporting Standards (IFRS) with 31 December as financial year end. The company performed some work for Adenta Municipal Assembly, a local government authority during 2016 and issued an invoice for the work for GH¢12 million in July 2016. The invoice was accepted as valid by the local government authority, but remains unpaid at the year end. In January 2017, following extensive press coverage, financial information was published showing that Adenta Municipal Assembly is heavily indebted and is unable to meet its obligations and pay its suppliers, including Adonko Ltd. This was unexpected by Adonko Ltd and no allowance had previously been made against the debt in Adonko Ltd’s financial statements.

The Government of Ghana stated on 1 February 2017 that it was not prepared to fund the excesses of regional and local governments and that, regional and local governments will need to make the necessary sacrifices to balance their budgets. Local governments are prohibited by national law from raising additional finance when it has exceeded the legal levels of indebtedness. Adenta Municipal Assembly stated that its priority was provision of social amenities and economic well-being of its inhabitants and that other suppliers must wait for payment, with no date specified. Based on written correspondence with the local government’s legal advisers, Adonko Ltd believes it will eventually receive full payment although this may be several years’ time, and that interest on late payment is unlikely.

Required:
As the Finance Director of Adonko Ltd, recommend the accounting treatment of the above, in the financial statements for the year ended 31 December 2016.                                                                                                                                         (5 marks)