Reference no: EM133008551

Question - Elexcars Pty Ltd is a Sydney based electrical car manufacturing company and has large presence in a number of countries. Being the accountant of the company, the owners have sought your advice on the treatment of the following items in the financial statements as at 30 June 2021.

During June 2021, Elexcars Pty Ltd was involved in a class-action lawsuit. The plaintiffs sought compensation for harms caused by the self-driving function available to the cars that are being sold. They met with serious accidents with some of them had to go through physical and mental trauma, broken bones, neck and spinal injuries and others. As a result, they also experienced loss of income given that they are not able to work while injured. Elexcars Pty Ltd claims that car owners should be blamed instead as car owners still have some control and responsibility for guiding an autonomous vehicle while it is being switched to self-driving mode.

However, Elexcars Pty Ltd has been found guilty at present. The judge has yet to award any damages. Similar lawsuits in the past suggest that Elexcars Pty Ltd will need to pay an estimated amount of $350,000 to $1,000,000 per plaintiff. The owners would like to include the damages as a liability in the balance sheet of Elexcars Pty Ltd for the 2021 financial year.

Required - Discuss whether the damages should be recognised as a liability in the Statement of Financial Position. Alternatively, what would you recommend to the owners the item be recorded as? Justify your answer with reference to the Conceptual Framework definition and recognition criteria of a liability, and AASB 137 Provisions, Contingent Liabilities, and Contingent Assets.