ExpertMedium2 marksMultiple Choice
ACCA · Question 18 · Recording transactions and events
A company is being sued for $500,000. The company's lawyers advise that it is possible (a 30% chance) that the company will lose the case. How should this be treated in the financial statements?
A company is being sued for $500,000. The company's lawyers advise that it is possible (a 30% chance) that the company will lose the case. How should this be treated in the financial statements?
Answer options:
A.
Recognized as a provision for $500,000
B.
Recognized as a provision for $150,000
C.
Disclosed as a contingent liability in the notes
D.
Ignored completely
How to approach this question
Assess the probability of the outflow. Probable (>50%) = Provision. Possible = Disclose. Remote = Ignore.
Full Answer
C.Disclosed as a contingent liability in the notes✓ Correct
Under IAS 37, if an outflow of economic benefits is 'possible' (but not probable), a contingent liability is disclosed in the notes to the financial statements. No provision is recognized.
Common mistakes
Calculating an expected value ($500k * 30%) and recognizing a provision.
Practice the full ACCA FA — Financial Accounting Practice Exam 2
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