Adiah's African Cuisine is a local 5-star restaurant offering delicious African traditional meals. The restaurant has a

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Question:

Adiah's African Cuisine is a local 5-star restaurant offering delicious African traditional meals. The restaurant has a 31 December year end.

On 1 October 2022, a restaurant guest suffered serious food poisoning after indulging freely from their most popular Sunday afternoon buffets. The guest has taken legal action against Adiah AC claiming compensation for hospital costs as they believe it must have been the tripe from the buffet because they felt sick immediately after eating it.

Adiah AC is fighting against this claim as they feel it is a ploy to ruin their reputation and are questioning why other guests have not come forward since it was a buffet - everyone dished up from the same tray. Indications during the court proceedings held in November 2022 were that indeed Adiah AC was probably responsible for the food poisoning as one of the chefs owned up to having forgotten to switch on one of the cold rooms which contained the tripe.

On 31 December 2022, the lawyers estimated the settlement cost would probably be R220 000 as the guest was still undergoing treatment. During December 2022 Adiah AC's lawyers are of the opinion that more guests who were served on this particular Sunday might probably come forward with legal action as well, although it was impossible to estimate the number of cases or their financial impact. To keep the situation contained and avoid more negative publicity the restaurant directors decided not to plead against the current case and willingly pay all costs.

You are one of the interns in the finance department of Adiah AC and are finalizing the financial statements for the year ended 31 December 2022.

2.1 Discuss separately how the settlement cost and the lawyer's opinion should be recognized, measured, and disclosed in the financial statements of Adiah AC for the year ended 31 December 2022 with reference to IFRS. (15 Marks)

Note to students:

Your answer should include relevant definitions from IAS 37 Provisions, Contingent Liabilities and Contingent Liabilities.