AYB 340 COMPANY ACCOUNTING - Case study 2 Unrecorded liability

Case study 2 unrecorded liability

Scorpio Ltd has finally concluded its negotiations to take over Norma Ltd, and has secured ownership of all the shares of Norma Ltd. One of the areas of discussion during the negotiation process was the current court case that Norma Ltd was involved in. the company was being sued by some former employees who were retrenched, but are now claiming damages for unfair dismissal. The company did not believe that it owed these employees anything. However, realising that industrial relations was an uncertain area, particularly given the country’s current confusing industrial relations laws, it had raised a note to the accounts issued before the takeover by Scorpio Ltd reporting the existence of the court case as a contingent liability. No monetary amount was disclosed, but the company’s lawyers had placed a $56,700 amount on the probable payout to settle the case.

The accounting staff of Scorpio Ltd is unsure of the effect of this contingent liability on the accounting for the consolidated group after the takeover. Some argue that it is not a liability of the group and so should not be recognised on consolidation, but are willing to accept some form of note disclosure. A further concern being raised is the effects on the accounts, depending on whether Norma Ltd wins or loses the case. If Norma Ltd wins the court case, estimated to be around $40,000.

Required

Give the group accountant your opinion on the accounting at acquisition data for consolidation purposes, as well as any subsequent effects when the entity either wins or loses the case. Assume FV= $40,000 on consolidation