Amankwatia Ltd (Amankwatia) is a local construction company. The regulation in the construction sector requires employers to provide personal protective equipment for every employee. The company failed to do that, and a Plumber got involved in an accident in the course of work resulting in a serious and costly injury. The Plumber has sued the company. The Solicitors of the company have prepared to vigorously defend the company in the lawsuit. They estimated that the company would have to make a compensation of GH¢17,000 to cover the injured party’s costs. A court decision, however, is not expected for at least a year.
Required:
What aspects of the conceptual framework might help you in determining the appropriate accounting treatment for this situation? (4 marks)
View Solution
The definition of liability can help decide the accounting treatment of the situation. Under the conceptual framework a liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. In this case, the past event is the fall and injury to the pedestrian.
Present obligation depends on the probability of payment. The solicitors has advised that a GH¢17,000 loss is probable. Therefore appropriate accounting involves recognizing a liability for the probable payment. An expense would also be recognized.
(Criteria for recognition of liability – 2 marks)
(Explanation of whether or not the Bank can be recognized – 2 marks)