KMW Inc. is one of North America\'s leading bus manufacturers and the company ha
ID: 2340763 • Letter: K
Question
KMW Inc. is one of North America's leading bus manufacturers and the company has a particularly strong reputation in the production of medium-sized school buses. On 15 August 20X1. company management completed the draft financial statements of the company for the current fiscal year ended 30 June 20X1 . KMW Inc. has had several ongoing litigation proceedings over the past two years concerning the safety of one of its older model buses. Management could not estimate the impact of the potential outcomes of these proceedings and no amount had been recorded on the company's financial statements On 17 August 20X1, the Superior Court of Justice of Ontario rendered its judgment on one of the litigation proceedings requiring KMW Inc. to pay a total of S5 million in damages to a number of former customers in the province of Ontario. On 21 August 20X1, company management followed statutory requirements and authorized the financial statements for issue. The financial statements were distributed to the shareholders on 5 September 20X1 and the shareholders approved the financial statements at the annual meeting on 13 September 20X1. The financial statements were then filed with the Ontario Securities Commission on 18 September 20X1 Requir'ed: (i) How should KMW Inc. account for the S5 million judgment in the company's financial statements for the fiscal year ended 30 June 20X1? Describe the factors you would consider and present your arguments to support your answer (ii) Would you answer to the question in part (i) be different if the judgment from the Superior Court of Justice was rendered on 27 August 20X1 instead of 17 August 20X1? Describe the difference, if any, and explain your reasoningExplanation / Answer
As per Financial Accounting Standards No.5, “Accounting for contingencies”, contingencies will be reported in the financial statements if both the following conditions are met;
Therefore, in view of above answer would be;
However, if such litigation amount impacts the “Going concern” assumption of company, then management need to report such effect in their financial statements before distribution to shareholders.
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