thorites cla aimed thatl the 7ocuments and other evidence which may prove that X
ID: 2332552 • Letter: T
Question
thorites cla aimed thatl the 7ocuments and other evidence which may prove that X Hotels L td has understated its nh proceedings w will be confirmed upon completion of investigatdoris s incomehesun raising a de the Company accou 3 have carried out a survey at X Hotels Ltd in February. The Au ,Ihe Indirect Tares Authonibes have certain docum ings ere completed in March. The Company learnt informally that the A uthorities would bo X L td is a leading Computer Hardware Manufacturer. Just before the end of the financial year, it receivod patent infringement from one of its Competitors, Y Ltd. The notice mentions that X Ltd has copied critoic some ofrl t's products. The Management ofX1 td discussed the case with its L egal counsel. The l e owever the amount of the demand could not be reliably estimated. How should t for this event in its Financial Statements? ied criucal features al Counsel was of the view that based o e view that based on facts available that notice was legally tenable, however, there was not enou Ltd? estimate the potenbal loss. How should the situation be dealt in books of X 6.66Explanation / Answer
In the first situation X Hotels shall record it as contingent liability. A contingent liability that is both probable and the amount can be estimated is recorded as 1) an expense or loss on the income statement, and 2) a liability on the balance sheet. Thus X Hotels shall give these effects
In the second situation X Ltd shall record it as loss contigency. A loss contingency which is possible but not probable, or the amount cannot be estimated, will not be recorded in the accounts. Rather, it will be disclosed in the notes to the financial statements. Thus X Ltd will not record it in FS but give the disclosures.
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