FACULTY OF MANAGEMENT, COMMERCE AND LAW

DEPARTMENT OF ACCOUNTANCY
Financial Reporting: ACC3141/3641

Examples
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

1
ASSETS
Example 1: Inventory

1.1. ABC Ltd purchased inventories to the value of R25 000 on 3 January 2019.
Required:
Discuss in terms of the Conceptual Framework if the inventories meets the definition
of an Asset.

Definition: (Par 4.3)

An asset is a present economic resource controlled by the entity as a result of past event. An
economic resource is a right that has the potential to produce economic benefit.

NB! THERE ARE NO MARKS AVAILABLE FOR QUOTING OF THEORY.

APPLICATION! APPLICATION! APPLICATION!

Right:
• ABC Ltd has ownership of the inventory and therefore has the right to sell the
inventory.(1)
• Therefore a right exist. (½P)

Potential to produce economic benefits

• The right to sell the inventory has the potential to produce economic benefit in a form
of cash (receivables if sold on credit) as revenue will be recognised from the sales of
the inventory.(1)
• Furthermore ABC Ltd would not have acquired the inventory had no market for the
inventory exist.(1)
• Therefore the right to inventory has the potential to produce economic benefits. (½P)

Control (par 4.20)

• Control is the present ability to:
(a) Direct the use of the economic benefit.
: ABC Ltd can direct how, when, whether and for what purpose the right to inventory
is used. It can decide whether to donate or sell the inventory, the pricing of the
inventory, whom to sell it to or whether to sell at all. (1)
(b) Obtain economic benefits that may flow from the economic resource.
: Cash generated from the sale of inventory will belong to ABC Ltd (Receivables
will belong to ABC Ltd if sold on credit) as a sales contract exists between ABC Ltd
and the customer. (1)
(c) Prevent others from directing the use of the economic resource and
: ABC Ltd owns the inventory and therefore has the ability to prevent other parties
from directing the use of the right to the inventory. (1)
(d) Prevent others from obtaining the economic benefit that may flow from the
economic resource.
: Cash received or receivable will accrue to ABC Ltd as the sales transaction is in
the name of ABC Ltd and the customer, as a result no other party but ABC Ltd can
obtain the economic benefits.(1)
• Therefore ABC Ltd controls the right to inventory. (½P)

Past event.
• The acquisition of the inventory on 3 January 2019 is the past event that gives ABC
Ltd the right to the inventory. (1)

Conclusion.

2
 • The inventory meets the definition of an asset in terms of the Conceptual Framework.
(½P)
(Available 12)
1.2. Should the inventory be recognised in ABC Ltd.’s financial statements?

An asset or liability is recognised only if recognition of the asset or liability and any resulting
income, expense or changes in equity provides users of financial statements with information
that is useful i.e. with relevant information that faithfully represents about the asset or liability
and any resulting income, expense or changes in equity. (Par 5.7)

Relevance:
Recognising an asset or liability may not provide relevant information if
(a) It Is uncertain whether the asset or liability exists or
(b) An asset or liability exist but the probability of an inflow or outflow of economic benefit
is low.

Existence uncertainty:
• The inventory gives rise to an asset as it is owned by ABC Ltd. (1)

Low probability of economic benefits.

• The inventory is in the normal course of business activities, it will be unlikely for
ABC Ltd to invest in inventory that would have a low probability of economic
benefits (saleability)
• Therefore recognising the inventory will provide relevant information. (1)

Faithful representation
Information about an asset will not give faithful representation if there is a measurement
uncertainty or other presentation and disclosure factors about it. (Par 5.18) (½)

Measurement uncertainty:
• The inventory can be measured with certainty at R 25 000, this being the historic
cost.(1)

Other factors:
• Presentation and disclosure of information about the asset or liability and resulting
income, expense or changes in equity.(½)
• There is adequate information to present and disclose the inventory.(1)

Conclusion:
• Recognising the inventory will result in faithful representation of information. (P)
(Available 8)

3
Example 2: Cash in the bank

2.1. ABC Ltd has deposited R850 000 in its bank account on 02 January 2019
Required.

Discuss in terms of the Conceptual Framework if the cash deposited meet the definition
of an Asset?

Definition: (Par 4.3)

An asset is a present economic resource controlled by the entity as a result of past event. An
economic resource is a right that has the potential to produce economic benefit.

Right
• ABC Ltd has the right to receive the cash from the bank. (1)
• Therefore a right exist. (½P)

Potential to produce economic benefits

• The cash can be used on its own or with other resources to produce inventory,
enhance plant or purchase equipment to name a few.(1)
• Therefore the right to cash has the potential to produce economic benefit. (½)

Control (Par 4.20)

Control is the present ability to:

(a) Direct the use of the economic benefit.

ABC Ltd can direct how, when, whether and for what purpose the right to cash is
used. (1)

(b) Obtain economic benefit that may flow from the economic resource.
Cash in the bank belongs to ABC Ltd, it is in ABC Ltd.’s bank account, and
therefore ABC Ltd can obtain economic benefits from using the cash.(1)

(c) Prevent others from directing the use of the economic resource and
ABC Ltd owns the cash and therefore has the ability to prevent other parties from
directing the use of the right to receive the cash.(1)

(d) Prevent others from obtaining the economic benefits that may flow from the
economic resource.
The cash is controlled through a legal contract with bank therefore ABC Ltd can
prevent other parties from obtaining the economic benefits that may flow from the
right to the cash. (1)
Therefore ABC Ltd controls the right to bank account. (½P)

Past event.
• The past event is the acceptance of the contract with the bank and the depositing
of the cash in the bank on the 02 January 2019. (½)

Conclusion.
• The bank account meets the definition of an asset in terms of the Conceptual
Framework. (½P)
(Available 9,5)

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2.2. Should the Bank account be recognised in ABC Ltd.’s financial statements?

An asset or liability is recognised only if recognition of the asset or liability and any resulting
income, expense or changes in equity provides users of financial statements with information
that is useful i.e. with relevant information that faithfully represents about the asset or liability
and any resulting income, expense or changes in equity. (Par 4.3-4.4)

Relevance:
Recognising an asset or liability may not provide relevant information if
(a) It Is uncertain whether the asset or liability exists or
(b) An asset or liability exist but the probability of an inflow or outflow of economic benefit
is low.

Existence uncertainty:
• It is certain that the cash exists reflected on ABC Ltd.’s bank account.(1)

Low probability of economic benefits.

• The bank account is in the normal course of running the business activities, it will
be unlikely for ABC Ltd to put its money in bank that would not guarantee the
money back when needed. (1)
• Therefore recognising the bank account will provide relevant information. (1)

Faithful representation
Information about an asset will not give faithful representation if there is a measurement
uncertainty or other presentation and disclosure factors about it.(par 5.18)

Measurement uncertainty:
• The bank account can be measured with certainty at R850 000 being the amount
reflected on the deposit slip.
Other factors:
• Presentation and disclosure of information about the asset or liability and resulting
income, expense or changes in equity.(½)
• There is adequate information to present and disclose relating to the bank
account.(1)

Conclusion:
• Recognising the bank account will result in faithful representation of information.(P)
(Available 7)

5
Example 3

ABC Ltd rents office space from Nathi Ltd, at R10 000 per month. ABC Ltd paid the
January 2019 rent during December 2018. (The financial year end of ABC is December)
Required:

3.1 Discuss in terms of the Conceptual Framework if the rent paid in advance meets the
definition of an Asset

Definition: (Par 4.3)

An asset is a present economic resource controlled by the entity as a result of past event.
An economic resource is a right that has the potential to produce economic benefit.

Right
• ABC Ltd has a right to occupy the office space or even sublet it in January 2019.(1)
• Therefore a right exist. (½P)

Potential to produce economic benefit

• The right to occupy the office can be used to produce cash through conducting its
trade or from subletting it.(1)
• Therefore the right to occupy the office has the potential to produce economic
benefits. (½P)

Control

Control is the present ability to:

(a) Direct the use of the economic benefit.
ABC Ltd can direct how, when, whether and for what purpose the office is used. It
can decide whether or not to occupy it, whether to sublet and for how much and
what activities to conduct in the office subject to the lessors protective rights. (1)

(b) Obtain economic benefit that may flow from the economic resource.
From using the office ABC Ltd is able to utilise the office to conduct its trade and
generate returns. (1)

(c) Prevent others from directing the use of the economic resource
ABC Ltd has a rental agreement with Nathi Ltd, therefore only they can direct what
and how the office will be used. (1)

(d) Prevent others from obtaining the economic benefits that may flow from the
economic resource.
Only ABC Ltd can obtain the economic benefits from the use of the office because
they have legal rights to do so due to the rental agreement. (1)

Therefore ABC Ltd controls the right to occupy the office. (½P)

Past event.
• The past event is the signing or the rental agreement and the payment of the rental
expense on the 31 December 2018. (1)

Conclusion.
• The rent prepaid meets the definition of an asset in terms of the Conceptual
Framework. (½)
(Available 11)

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3.2 Should the prepaid rent be recognised in ABC Ltd.’s financial statements?

An asset or liability is recognised only if recognition of the asset or liability and any resulting
income, expense or changes in equity provides users of financial statements with information
that is useful i.e. with relevant information that faithfully represents about the asset or liability
and any resulting income, expense or changes in equity.(par 5.7)

Relevance:
Recognising an asset or liability may not provide relevant information if
(a) It is uncertain whether the asset or liability exists or
(b) An asset or liability exist but the probability of an inflow or outflow of economic benefit
is low.

Existence uncertainty:
• The rent prepaid gives rise to an asset due to the rental agreement. (1)

Low probability of economic benefits.

• Probability of the inflow is not low as the rental payment has occurred and ABC Ltd
will be able to use the office space to run their business. (1)

Faithful representation

Information about an asset will not give faithful representation if there is a measurement
uncertainty or other presentation and disclosure factors about it. (Par 5.18)

Measurement uncertainty:

• The rent prepaid can be measured with certainty at R 10 000 being the amount
actually paid.

Other factors:
• Presentation and disclosure of information about the asset or liability and resulting
income, expense or changes in equity. (½)
• There is adequate information to present and disclose the rent prepaid. (1)

Conclusion:
• Recognising the prepaid rent will result in faithful representation of information.
(1)
(Available 7)

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Example 4
ABC Ltd acquired a machine from Boroto Ltd at R330 000 on 31 March 2018. The
machine will be used in the production of bread.

Required:
4.1 Discuss in terms of the Conceptual Framework if it meets the definition of an Asset?

Definition: (Par 4.3)

An asset is a present economic resource controlled by the entity as a result of past event.
An economic resource is a right that has the potential to produce economic benefit.

Right
• ABC Ltd has the ownership of the machine therefore has right use, sell or even pledge
the machine as security for the purpose of obtaining a bank loan. (1)
• Therefore a right exist. (½P)

Potential to produce economic benefits

• The right to use the machine to produce bread has the potential to produce
economic benefits as the sale of bread will give rise to cash or receivable being the
economic benefit. (1)
• Therefore the right to use the machine has the potential to produce economic
benefits. (½)

Control

Control is the present ability to:

(a) Direct the use of the economic benefit.
ABC can direct how, when, whether and for what purpose the machine is used. It can
therefore decide when to produce the bread or whether to produce the bread at all. It
may even decide to sell it. (1)

(b) Obtain economic benefit that may flow from the economic resource.
All the proceeds from the sale of bread belong to ABC Ltd through the existence
of a sales contract with the customer, thus has the ability to obtain the economic
benefits. (1)

(c) Prevent others from directing the use of the economic resource
The machine is physically at ABC Ltd premises therefore no other party can direct
its use other than ABC Ltd. (1)

(d) Prevent others from obtaining the economic benefit that may flow from the
economic resource.
Proceeds from the bread are due to only ABC Ltd as the sales contract with the
customer is in the name of ABC Ltd, and therefore no other party can obtain the
machine’s economic benefits. (1)
Therefore ABC Ltd controls the machine. (½P)

Past event.
• The acquisition of the machine on 31 March 2018 is the past event. (1)

Conclusion.
• The machine meets the definition of asset. (½)

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4.2 Should the machine be recognised in ABC Ltd.’s financial statements?

An asset or liability is recognised only if recognition of the asset or liability and any resulting
income, expense or changes in equity provides users of financial statements with information
that is useful i.e. with relevant information that faithfully represents about the asset or liability
and any resulting income, expense or changes in equity.(par 5.7)

Relevance:
Recognising an asset or liability may not provide relevant information if
(a) It Is uncertain whether the asset or liability exists or
(b) An asset or liability exist but the probability of an inflow or outflow of economic benefit
is low.

Existence uncertainty:
• It is certain that machine exist as ABC Ltd brought it and it’s in their possession.
(1)

Low probability of economic benefits.

• Probability of an inflow of economic benefit is high as it is unlikely that the entity
would have purchased the machine if there was no market for which the bread
would be sold. (1)

Faithful representation
Information about an asset will not give faithful representation if there is a measurement
uncertainty or other presentation and disclosure factors about it.(par 5.18) (½)

Measurement uncertainty:
• The machine can measured with certainty at R330 000 being its historic cost. (1)

Other factors:
• Presentation and disclosure of information about the asset or liability and resulting
income, expense or changes in equity.
• There is adequate information to present and disclose the machine. (1)

Conclusion:
• Recognising the machine will result in faithful representation of information. (P)
(Available 7,5)

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Example 5
ABC Ltd sold their stock on credit to Mr L on 4 January for R20 000.
Required:
5.1 Discuss in terms of the Conceptual Framework if it meets the definition of an Asset?
• An asset is a present economic resource controlled by the entity as a result of past
event.
• An economic resource is a right that has the potential to produce economic benefit.

Right
• ABC has the right to receive cash from Mr L as settlement of the debt. (1)
• Therefore a right exist. (½P)

Potential to produce economic benefits

• The right to receive the amount as settlement for his account in a form of cash
produces an economic benefits. (1)
• Therefore the right to the account receivable has the potential to produce economic
benefits. (½P)

Control
• Control is the present ability to:
(a) Direct the use of the economic benefit.
ABC Ltd can direct how, when and for what purpose the right to account receivable
is used. It can for example factor it or pledge it as security. (1)

(b) Obtain economic benefit that may flow from the economic resource.
Cash received from Mr L will belong to ABC Ltd and Mr L is obliged to pay ABC
Ltd as per the sales agreement. (1)

(c) Prevent others from directing the use of the economic resource.
ABC Ltd has legal ownership of the debt due, it may therefore deal with it as it
deems fit. (1)

(d) Prevent others from obtaining the economic benefit that may flow from the
economic resource.
ABC can legally prevent other parties from obtaining economic benefit as a
contract between Mr L and ABC Ltd exists, therefore any amount paid by Mr L as
settlement of the debt will accrue to ABC. (1).

Therefore ABC Ltd controls the account receivable. (½P)

Past event
• The credit sale to Mr L on 4 January 2019 gave rise to the past event. (1)

Conclusion.
• The account receivable from Mr L meets the definition of the asset in terms of the
Conceptual Framework. (½)

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5.2 Should the Account receivable be recognised in ABC Ltd.’s financial statements?

An asset or liability is recognised only if recognition of the asset or liability and any resulting
income, expense or changes in equity provides users of financial statements with information
that is useful i.e. with relevant information that faithfully represents about the asset or liability
and any resulting income, expense or changes in equity.(par 5.7)

Relevance:
Recognising an asset or liability may not provide relevant information if (1)
(a) It is uncertain whether the asset or liability exists or
(b) An asset or liability exist but the probability of an inflow or outflow of economic benefit
is low. (Par 5.12)

Existence uncertainty:
• The account receivable give rise to an asset as it is owed to ABC Ltd. (1)

Low probability of economic benefits.

• The account receivable is in the normal course of business [Link] would be
highly unlikely for ABC to sell on credit to individuals who are unable to pay and it
can be assumed that proper credit checks are done prior to credit sales.
• Therefore the probability of inflow of economic benefit is not low.(1)

Faithful representation
Information about an asset will not give faithful representation if there is a measurement
uncertainty or other presentation and disclosure factors about it.(par 5.18) (½)

Measurement uncertainty:
• The account receivable can be measured with certainty at R20 000, being the
invoiced amount. (1)

Other factors:
• Presentation and disclosure of information about the asset or liability and resulting
income, expense or changes in equity.(½)
• There is adequate information to present and disclose the account receivable. (1)

Conclusion:
• Recognising the account receivable will result in faithful representation of
information. (1)
(Available 7,5)

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LIABILITIES
Example 1. Payable
Nairo Ltd purchased inventory on credit from Nathi Ltd for R49 000 on 6 February 2019.

Required:
1.1 Does the payable meet the definition of a liability?

A liability is a present obligation of an entity to transfer an economic resource as a result of

past event. (Par 4.26)

Obligation:
• An obligation is a duty or responsibility that an entity has no practical ability to
avoid.(par 4.29)
• Nairo Ltd is legally bound to pay for the goods purchased from Nathi Ltd as a legal
contract was concluded between the two parties. Nathi Ltd can enforce its right to
payment. (1)
• An obligation thus exists. (½P)

Transfer of an economic resource:

• The payment of the obligation will result in a transfer of cash from Nairo Ltd or transfer
of another economic resource if the obligation is settled in a form other than cash. (1)
• The obligation will result in the transfer of an economic resource. (½P)

Present obligation as a result of past event.

A present obligation exist as a result of past event if: (Par 4.42)
(a) The entity has already obtained economic benefit or taken an action and
(b) As a consequence, the entity will or may have to transfer an economic resource that it
would not otherwise have had to transfer.

• An economic benefit in the form of acceptance of the inventory has already been
obtained and as a consequence (1)
• Nairo Ltd has to transfer cash to settle its obligation that arose from the acceptance of
the above economic benefits. (1)
• The obligation arose as a result of past event being the acceptance of the inventory.
(½)

Conclusion
The trade payable meets the definition of liability. (½P)
(Available 8,5)

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1.2 Should the payable be recognised in the financial statements of Nairo Ltd?

An asset or liability is recognised only if recognition of the asset or liability and any resulting
income, expense or changes in equity provides users of financial statements with information
that is useful i.e. with relevant information that faithfully represents about the asset or liability
and any resulting income, expense or changes in equity. (par 5. 7)

Relevance:
Recognising an asset or liability may not provide relevant information if (par 5.12) (1)
(a) It is uncertain whether the asset or liability exists or
(b) An asset or liability exist but the probability of an inflow or outflow of economic benefit
is low.

Existence uncertainty:
• The payable exists as the purchased inventory was accepted and is reflected in
the inventory ledger (1)

Low probability of economic benefits.

• It’s unlikely that the creditor would have sold the goods on credit if Nairo Ltd was
not creditworthy. There is thus a high probability that Nairo Ltd will settle its debt.
(1)
• Therefore the probability of outflow of economic benefit is not low. (½P)

Faithful representation
Information about an asset will not give faithful representation if there is a measurement
uncertainty or other presentation and disclosure factors about it.

Measurement uncertainty:
• The payable can be measured with certainty at R49 000, this being the invoiced
amount.

Other factors:
• Presentation and disclosure of information about the asset or liability and resulting
income, expense or changes in equity. (½)
• There is adequate information to present and disclose the payable. (1)

Conclusion:
• Recognising the payable will result in faithful representation of information. (1)
• The payable should be recognised in the financial statements of Nairo Ltd. (½P)
(Available 7,5)

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Example 2: Overdraft facility
Nairo Ltd is a company in the construction industry, due to current strain on economic
growth in South Africa, it has experienced financial difficulty during the 2018 financial
year, and as a result it had to fully utilise its bank overdraft facility of R100 000.

Required:

2.1 Does the bank overdraft meet the definition of a liability?

A liability is a present obligation of an entity to transfer an economic resource as a result of

past event.

Obligation:
• An obligation is a duty or responsibility that an entity has no practical ability to
avoid.(par4.29)(½)
• Nairo Ltd is legally required to repay the amount used as per the agreement with the
bank. The bank can thus enforce its right to payment. (1)
• An obligation thus exist. (½)

Transfer of an economic resource:

• The payment of the bank overdraft will result in a transfer of cash from Nairo Ltd to the
bank. (1)
• The obligation will result in the transfer of an economic resource. (½P)

Present obligation as a result of past event.

A present obligation exist as a result of past event if: (1)
(a) The entity has already obtained economic benefits or taken an action and
(b) As a consequence, the entity will or may have to transfer an economic resource that it
would not otherwise have had to transfer.

• Nairo Ltd has already obtained economic benefits through the use of the overdraft and
as a result will need to use cash to settle the bank overdraft therefore transferring the
economic benefit. (1)

Conclusion
The bank overdraft meet the definition of liability. (½P)
(Available 6,5)

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2.2 Should the bank overdraft be recognised in Nairo Ltd.’s financial statements?

An asset or liability is recognised only if recognition of the asset or liability and any resulting
income, expense or changes in equity provides users of financial statements with information
that is useful i.e. with relevant information that faithfully represents about the asset or liability
and any resulting income, expense or changes in equity. (Par 5.7)

Relevance:
Recognising an asset or liability may not provide relevant information if (par 5.12)
(a) It is uncertain whether the asset or liability exists or
(b) An asset or liability exist but the probability of an inflow or outflow of economic benefit
is low.

Existence uncertainty:
• It is certain that the liability exits as reflected on the entity’s bank
statement/account.

Low probability of economic benefits.

• Nairo is expected to settle the overdraft, it is unlikely that the bank would’ve
advanced the credit if Nairo was not credit worthy. (1)
• Therefore the probability of outflow of economic benefit is not low. (½)

Faithful representation
Information about an asset will not give faithful representation if there is a measurement
uncertainty or other presentation and disclosure factors about it. (½)

Measurement uncertainty:
• The bank overdraft can be measured with certainty at R100 000, being the amount
advanced as per the agreement with the bank.

Other factors:
• Presentation and disclosure of information about the asset or liability and resulting
income, expense or changes in equity. (½)
• There is adequate information to present and disclose the bank overdraft. (1)

Conclusion
• Recognising the bank overdraft will result in faithful representation of information. (½)
• The bank overdraft should be recognised in the financial statements of Nairo Ltd. (½P)
(Available 6,5)

15
Example 3: Fines
XY Ltd is in the cement industry, the competition commission, through its investigation
has discovered that XY Ltd has been involved in price fixing scheme with two of its
competitors. The competition commission subsequently imposed a fine of R10 million.
XY Ltd views this fine as being unfair and thus referred the matter to court. The court
date is set to be on 31 march 2019.

Required:
3.1 Does the fine meet the definition of a liability?

A liability is a present obligation of an entity to transfer an economic resource as a result of

past event. (Par 4.26)

Obligation:
An obligation is a duty or responsibility that an entity has no practical ability to avoid. (par 4.29)
• XY Ltd is legally required to pay the amount owed, there is no way that it will be able
to avoid paying the competition commission. (1)
• An obligation exists. (½P)

Transfer of an economic resource

• A law was contravened and a fine as per the law must be imposed. XY Ltd will thus
transfer an economic resource being cash to settle the fine. (1)

Present obligation as a result of past event.

A present obligation exist as a result of past event if:
(a) The entity has already obtained economic benefit or taken an action and
(b) As a consequence, the entity will or may have to transfer an economic resource that it
would not otherwise have had to transfer. (par 4.43)

• XY Ltd has taken an action by engaging in an unlawful act, and as result a fine was
imposed. It would thus have to settle the fine by transferring an economic resource
which it would have otherwise not have had to transfer had it acted lawfully. (1)
• The past event is the breaking of the law. (½P)

Conclusion
The legal cost meet the definition of liability. (½P)
(Available 7,5)

16
3.2 Should the legal cost be recognised in XY Ltd.’s financial statements?

An asset or liability is recognised only if recognition of the asset or liability and any resulting
income, expense or changes in equity provides users of financial statements with information
that is useful i.e. with relevant information that faithfully represents about the asset or liability
and any resulting income, expense or changes in equity. (Par 5.7)

Relevance: (par 5.12)

Recognising an asset or liability may not provide relevant information if
(a) It is uncertain whether the asset or liability exists or
(b) An asset or liability exist but the probability of an inflow or outflow of economic benefit
is low.

Existence uncertainty:
• It is certain a liability, being a fine exists as XY Ltd acted unlawfully.

Low probability of an outflow of economic benefits.

• It is certain that XY will pay a fine as a law was contravened. (1)
• Therefore the probability of outflow of economic benefit is high. (½P)

Faithful representation
Information about an asset will not give faithful representation if there is a measurement
uncertainty or other presentation and disclosure factors about it. (½)

Measurement uncertainty:
• The final amount to be paid can be estimated through consultations with legal
experts. Thus the measurement uncertainty can be assessed as medium to
low. (½)

Other factors:
• Presentation and disclosure of information about the asset or liability and resulting
income, expense or changes in equity. (½)
• There is adequate information to present and disclose the legal cost. (1)

Conclusion
• Recognising the legal cost will result in faithful representation of information. (½)
• The legal cost should be recognised in the financial statement of Naira Ltd. (½P)
(Available 6,5)

Adopted: UL

17