You are an accountant employed to AMC Accountancy Firm. The following events occurred in the business of

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Question:

You are an accountant employed to AMC Accountancy Firm. The following events occurred in the business of separate clients of AMC. You are responsible for assisting in the preparation of their financial statements.

i. Fairfield Plc. gives warranties at the time of sale to purchasers of its products. At year ended December 31, 2020, Fairfield assessed its warranty obligation to be $1,000,000.
On February 15, 2021, Fairfield discovered a defect in one of its product lines. As a result, Fairfield reassessed its estimate of warranty obligation at December 31, 2020 to be $1,350,000. The company's financial statements were authorised for issue on March 1, 2021.

ii. Wellington's financial year ended on March 31, 2021, and its directors authorized the issue of the statements on May 6, 2021. On April 12, 2021, a fire completely destroyed Wellington's largest warehouse and the inventory it contained. The carrying amounts of
the warehouse and the inventory were $10 million and $6 million respectively. It appears that the company has not updated the value of its insurance cover and only expects to be able to recover a maximum of $9 million from its insurers. Wellington's trading operations have been severely disrupted since the fire and it expects large trading losses for some time to come.

Required:
A. Explain the period to which IAS 10 relates and distinguish between adjusting and non-adjusting events.

B. In EACH of the matters above, discuss how the matter should be dealt with under IAS 10.

C. Hoover Co. is being sued by one of its employees who was injured from the use of a faulty machine. The company received legal advice that the most likely outcome of the court case is that they will lose the case and have to pay $10m. The legal team thinks there is an 80% chance of this. They also believe there is a 10% chance of having to pay $12m, and a 10% chance of paying nothing.

Hoover's legal advisors continue to believe that it is likely that the company will lose the court case against the employee and have to pay out $10m. However, it has come to light that the company may have a counter claim against the manufacturer of the machinery. The legal advisors believe that there is an 80% chance that the counter claim against the manufacturer is likely to succeed and believe that Hoover Co. would win $8m.

Required:
Using the principles of IAS 37, advise Hoover on how this event should be dealt with in its financial statement at year end.