ACCA · Question 12 · Audit and Assurance
CASE 3: AEROFORGE HEAVY INDUSTRIES
AeroForge Heavy Industries manufactures industrial turbines. The manufacturing process takes 8 months per turbine. At year-end, there is significant Work-in-Progress (WIP). AeroForge provides a 5-year warranty on all turbines. During the year, a major customer sued AeroForge for $2m due to a turbine failure; AeroForge's lawyers believe a payout is 'possible' but not 'probable'. AeroForge revalued its manufacturing plant this year, resulting in a $5m revaluation surplus.
QUESTION:
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, how should the $2m lawsuit be treated in the financial statements of AeroForge?
Answer options:
A provision of $2m should be recognized in the statement of profit or loss.
It should be disclosed as a contingent liability in the notes to the financial statements.
It should be ignored completely as the payout is not probable.
A provision of $1m (50%) should be recognized to reflect the uncertainty.
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