Section A

Silverstone Mining is currently facing a lawsuit from environmental regulators. The company's legal team advises that it is 'possible' but not 'probable' that the company will lose the case and have to pay a fine of $500,000.

How should this be treated in the financial statements according to IAS 37?

Answer options:

Recognize a provision of $500,000 in the statement of financial position

Disclose as a contingent liability in the notes to the financial statements

Ignore it completely as the outflow is not probable

Recognize a provision for a best estimate amount less than $500,000

How to approach this question

Assess the probability of the outflow. If probable (>50%), provide. If possible, disclose. If remote, ignore.

Full Answer

B.Disclose as a contingent liability in the notes to the financial statements✓ Correct

Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, an obligation that is 'possible' (but not probable) is classified as a contingent liability. It should not be recognized in the financial statements but must be disclosed in the notes.

Common mistakes

Recognizing a provision just because a specific monetary amount is mentioned.

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