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How should the policy of refunding customers be disclosed

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Question - You have been asked to help prepare the financial statements of Merched Ltd for the year ended 31 March 20X3. Legal proceedings have been started against the company because of faulty products supplied to a customer. The company's lawyers advise that it is probable that the entity will be found liable for damages of £250,000. Explain how you would treat the probable damages arising from the legal proceedings in the financial statements. Refer, where relevant, to accounting standards.

During the year, the directors decided to offer refunds to dissatisfied customers, provided that these were claimed within three months of the date the goods were purchased. There are large notices explaining this policy on every floor of the store. Since the policy was introduced, refunds have been claimed on roughly 2% of all sales.

Prepare brief notes for the directors of Houghton Ltd to answer the following questions:

(a) When should a provision be recognised, according to IAS 37 Provisions, Contingent Liabilities and Contingent Assets?

(b) How should the policy of refunding customers be treated in the financial statements for the year?

(c) How should the policy of refunding customers be disclosed in the notes to the financial statements?

Reference no: EM133067375

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