CASE STUDY Surgimed Ghana Ltd. operates in the medical supply industry and specializes in sales and installation of medical equipment and devices such as hospital furniture, medical equipment, electronic equipment, local area networking with a station monitoring and general telecom networking. The company is noted for installation of Sterilization Units, X-Ray machines and Ultrasound
CASE STUDY
Surgimed Ghana Ltd. operates in the medical supply industry and specializes in sales and installation of medical equipment and devices such as hospital furniture, medical equipment, electronic equipment, local area networking with a station monitoring and general telecom networking. The company is noted for installation of Sterilization Units, X-Ray machines and Ultrasound scanners, Installation of Medical Gas Pipe Lines and Operation Theater Requirements around the country. At the end of the 2020 financial year, the directors of the company were not sure whether they have treated the following transactions in their financial statements ending 31st December, 2020 correctly.
Transaction A
Surgimed’s board of directors aimed at ensuring the highest standard of transparency and accountability to all stakeholders. As a result, they require the executive management to fully disclose every financial transaction in the financial statements as separate items. However, the company’s accountant who is a member of the Institute of Chartered Accountants Ghana disagrees citing the issue of materiality thresholds required under the conceptual framework. IAS 1 Presentation of Financial Statements requires the disclosure of material transactions as a means of achieving relevance, accountability and transparency. The International Accounting Standards Board (IASB) helps in this regard by further defining the nature of materiality in the Conceptual Framework
Required
Discuss the nature of materiality to the directors of Surgimed Ghana Ltd. Do you think practicing accountants should use similar principles as preparers of financial statements when making judgements in applying the concept of materiality to financial statements?
Transaction B
Surgimed Ghana Ltd. imports medical equipment which is manufactured under a patent. It subsequently adapts the equipment to fit the market in its jurisdiction and sells the equipment under its own brand name. Surgimed Ghana Ltd. originally spent GH¢8 million in developing the know how required to adapt the equipment and, in addition, it costs around GH¢80,000 to adapt each piece of equipment. Surgimed Ghana Ltd. has capitalised the cost of the know-how and also the cost of the adaptation of each piece of equipment sold, as patent rights.
Surgimed Ghana Ltd. is being sued for patent infringement by Biotech Ltd., the owner of the original patent, on the grounds that Surgimed Ghana Ltd. has not materially changed the original product by its subsequent adaptation. If Biotech Ltd. is able to prove infringement, the court is likely to order Surgimed Ghana Ltd. to pay damages and to stop infringing its patent. Surgimed Ghana Ltd. lawyers feel that the court could conclude that Biotech Ltd. patent claim is not valid.
Biotech Ltd. has sued Surgimed Ghana Ltd. for GH¢6 million for the use of a specific patent and an additional GH¢2 million for lost profit due to Surgimed Ghana Ltd. being a competitor in the market for this product. Surgimed Ghana Ltd. has offered GH¢6 million to settle both claims but has not received a response from Biotech Ltd. As a result, Surgimed Ghana Ltd. feels that the damages which it faces will be between the amount offered by Surgimed Ghana Ltd. and the amount claimed by Biotech Ltd.
Required
The directors of Surgimed Ghana Ltd. would like you to advise them as to whether they have correctly accounted for the costs of the adaptation of the equipment. Do you think the company should make a provision for the potential damages in the above legal case, in their financial statements for the year ended 31st December, 2020?
Transaction C
Surgimed Ghana Ltd. sells technology needed to perform highly complex operations. When a hospital purchases equipment from Surgimed Ghana Ltd., it provides a very specialised piece of instrumentation, which is an integral part of the surgical process, free of charge. The legal ownership of the instruments remains with Surgimed Ghana Ltd. The instruments are returned to Surgimed Ghana Ltd. if they become faulty or at the end of their useful life, which is normally 1·5 years. At this point, Surgimed Ghana Ltd. replaces them with new instruments but retains the right to be reimbursed if the instruments are not returned. The instruments are nearly always returned at the end of their useful life and disposed of as clinical waste.
Required
The directors of Surgimed Ghana Ltd. would like advice on the accounting treatment for the instruments sold to the hospitals.
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