Provisions and Contingencies — ACCA Practice Question 18

How to approach this question

Apply the rules of IAS 37 based on the probability of the outflow: Probable = Provision, Possible = Disclose Contingent Liability, Remote = Do nothing.

Full Answer

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

According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, if a present obligation exists but an outflow of resources is only 'possible' (less than 50% likely, but not remote), it is classified as a contingent liability. Contingent liabilities are not recognized in the financial statements but must be disclosed in the notes.

Common mistakes

Recognizing a provision when the outflow is only 'possible', or ignoring it completely.

A public utility company is facing a lawsuit from a local community group for environmental damage. The company's lawyers advise that it is possible, but not probable, that the company will lose the case and have to pay damages of $5 million. How should this be treated in the financial statements?

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 3

More questions from this exam