(a) Sparkling Pictures plc is a company which specialises in video production. The company is preparing its financial statements for the financial year ended 30 April 2018. 

During the financial year ended 30 April 2017 Sparkling Pictures plc was responsible for videoing an important prize awards ceremony for subsequent broadcast on television. Shortly after the ceremony twenty-two people who had been there became seriously ill. They claimed that Sparkling Pictures plc was responsible because a poisonous chemical used in the manufacture of digital video tapes had been found in a soup tureen which had been used during the ceremony. 

Legal proceedings seeking damages from Sparkling Pictures plc were started during the financial year ended 30 April 2017. Sparkling Pictures plc denied liability and up to the date of authorisation of the financial statements for the year ended 30 April 2017 the company’s lawyers were confident that the evidence against the company was weak and circumstantial and that it was probable that Sparkling Pictures plc would not be found liable. 

However, additional evidence emerged during the year ended 30 April 2018 which has caused Sparkling Pictures plc’s lawyers to change their advice. They are now of the opinion that it is probable that Sparkling Pictures plc will be found liable.

Required:
Explain, with reasons, how this matter would have been reported in the financial statements for the year ended 30 April 2017 and how it should be reported in the financial statements for the year ended 30 April 2018.

(b) Stenberg plc is preparing its financial statements for the year ended 30 November 2017. 

An employee is claiming damages of £15,000 against Stenberg plc because of injuries received while driving one of the company’s delivery vans in September 2017. The employee is claiming that Stenberg plc was negligent in its maintenance of the van and that the van crashed because of poor maintenance. Stenberg plc’s lawyer is of the opinion that the probability of the employee winning the case is 80%. 

Stenberg plc is making a claim for damages of £25,000 against a contractor to cover the additional costs of making good faulty work on a contract. The contractor had refused to make good the work because they were too busy with work on other contracts. Stenberg plc’s lawyer is of the opinion that the probability of winning this claim is 85%.

Required:
For each of the two legal claims Stenberg plc is involved in discuss whether or not a provision should be made in the financial statements for the year ended 30 November 2017.

(CIPFA)