Ashiyie Ltd is a telecommunication company that prepares accounts in accordance with International Financial Reporting Standards (IFRS). A meeting of the Directors of Ashiyie Ltd is scheduled for 5 December 2017 to discuss the following matters with a view to finalising the accounts for the year ending 30 October 2017:
i) A fire occurred in one of the warehouses of Ashiyie Ltd on 3 November 2017, destroying inventory which had a cost price of GH¢100,000 and a net realisable value of GH¢150,000.
ii) On 9 November 2017, Ashiyie Ltd received information that one of their largest customers had gone bankrupt. At 30 October 2017, this customer owed Ashiyie Ltd GH¢235,000. It is anticipated that Ashiyie Ltd can only receive 10 pesewas for every GH¢1 they were owed.
iii) In November 2017, Ashiyie Ltd sold inventory which had been in one of their warehouses for the past two years, for GH¢75,000. This had been included in the financial statements, for the year ended 30 October 2017, at its cost price of GH¢105,000.
iv) On 30 October 2017, an employee of Ashiyie Ltd fell and injured her arm at work. This employee has commenced legal action. The Solicitors for Ashiyie Ltd informed the company on 10 August 2017, that it is probable they will be found liable and have to pay this employee GH¢33,000. The employee has worked for Ashiyie Ltd for the past 4 years.
Required:
Advise the board on the accounting treatment of these issues. Your answer should give a detailed reason for the accounting treatment that you have chosen. (10 marks)
View Solution
i) This is a non-adjusting event as it occurred after the statement of financial position date. If it is material it should be disclosed in the financial statements, but it should not be recognised in the financial statements.
ii) This is an adjusting event as it provides evidence of conditions that existed at the statement of financial position date. The company should recognise this in the accounts by debiting bad debts GH¢211,500 (90/100*235,000) and crediting trade receivables GH¢211,500.
iii) This is also an adjusting event as it confirms the net realisable value of the goods that were in stock at 30 October 2017. The company will have to recognise this by reducing the value of closing inventory in the financial statements.
iv) This is an adjusting event. As the injury took place prior to the year end it has now been confirmed that the company will probably have to pay out GH¢33,000 in compensation. The company will have to recognise a provision of GH¢33,000 in the financial statements by debiting provision expense GH¢33,000 and crediting provision statement of financial position GH¢33,000.