You have just returned from a 30-minute meeting with the company’s attorneys.  In that meeting, you reviewed three separate legal situations involving pending lawsuits pertaining to the company’s products and operations.  The following situations were reviewed.

a]   A product liability lawsuit brought against MyTee by a competitor for a patent infringement.  The attorney assessed the likelihood of losing the lawsuit as reasonably possible at 60%.  The attorney also assessed the possible estimates of damages to be $500,000 (at 25%), $750,000 (at 40%), $1,000,000 (15%), $1,250,000 (at 10%) and $1,500,000 (at 10%).  

b]   MyTee had brought a claim against the provincial government for non-fulfillment of contractual terms.  The attorney is highly optimistic of receiving damages from the government with estimates ranging from $9,000,000 to $1,600,000.

c]   A personal liability lawsuit brought against the company by an ex-employee in which the claimant is seeking substantial unspecified damages for alleged injuries suffered while at work.  The attorney assesses the likelihood of losing to be at 10% but yet recommends a settlement by offering a $50,000 payment.  In his opinion, it would be more economical for the company to settle at this amount than to proceed to the trial stage.  The management has agreed to this suggestion and an offer has been made to the claimant.

Required:

For each of the above situations,

1.   Explain how each lawsuit would be accounted for under IFRS.  Be sure to briefly relate to the requirements of IFRS.

2.   For each case, prepare the journal entries, as required at the end of the year.

Answer rating: 100% (QA)

Complete solution is given below Under IFRS Loss contingencies are recorded ie Recognised within the financial statement also disclosed as notes to it ... View the full answer