Reference no: EM132870371

Question - In preparing the financial statements of Lam Company Limited (Lam) for the year ended 31 December 2011, Nelson, the financial controller of Lam, identified the following material events that took place after the balance sheet date, The board of directors of Lam approved the financial statements for issue on 20 March 2012.

a. On 3 January 2012, Lam announced its plan to discontinue the retail business operation in China. The decision to discontinue this operation was passed in the board of directors meeting held on 28 December 2011.

b. On 9 January 2012, Lam entered into a sale and purchase agreement with an independent third party to dispose of a building at a consideration of $100 million. The sale and purchase agreement was subsequently duly completed on 9 February 2012, resulting in a gain on disposal of appropriately $48 million.

c. On 25 January 2012, a major production plant in China was destroyed by a flood.

d. On 23 February 2012, Lam was sued by a customer for $20 million damages. The customer claimed that his son had been suffocated by a small part of a toy product sold by Lam. The suffocation resulted in permanent damage to the boy's brain, and the boy was still in a coma. According to the assessment of the doctor in charge, it was very likely that the boy would need intensive care for the remainder of his life, The case will not be heard until September 2012, and the verdict cannot be predicted.

e. On 10 March 2012, as a result of a court judgement, Lam had to pay damages of $6 million to a vendor for breach of contract occurring between May and November 2011.

Required - Explain the accounting treatment for the above events after the balance sheet date by reference to relevant accounting standards.