Reference no: EM131814059
Question: Mega Consultancy Limited ('MCL') is a management consultancy company. It earns its revenue (service fee) by providing securities trading advice for clients. Alan Wong, the financial accountant of MCL, is in the process of finalizing the financial statements of 2016. He needs to decide on the appropriate treatment of the following accounting issues:
a. A new employment policy was launched in January 2016. MCL decided to pay a long service award to the employees who had served at MCL for 15 years or more. According to the newly implemented policy, the long service award was calculated based on the last salary received by the awardee. Ten employees met the requirements as of 31 December 2016.
b. In order to boost sales, MCL provided a money-back guarantee for its clients. According to the money-back guarantee policy, if the client lost money within three months after following its securities trading advice, MCL would refund 15% of the service fee back to the client.
c. MCL had a lawsuit with Phoenix Limited in respect of a defective product delivered to MCL for use in 2015. MCL claimed a compensation of $500,000. On 12 December 2016, the lawyer of MCL informed MCL that Phoenix Limited would probably lose the case and the court judgment would be made in April 2017.
Required: With reference to the relevant accounting standards, recommend the appropriate accounting treatment for each of the above activities. Justify your answer.
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