Ias 37

davejvh

Hello all,

see what you think of this question:

[X ltd] is being sued at the year end and may have to pay substantial damages if found guilty. At the year end [X ltd]'s lawyers advise [X ltd] that it is probable they will lose the case.
In accordance with IAS 37, the probable future outflow should be:
*Ignored
*Treated as a provision
*Treated as a contingent liability
*Disclosed as a note only


Which answer would you choose? My logic is as follows:
-ignored - definitely not

-treated as provision - out of the three criteria for a provision: obligation must exist (only probable obligation at the time of year end), probably outflow of resources to settle obligagion (yes), reliable estimate can be made of the obligation (no data given to indicate a reliable estimate can be made), so student is lead to think "no" to 2 of the 3 criteria to treat as a provision

-contingent liability (seems to be best option, "possible obligation whose existence will be confirmed only by occurrence or non-occurrence of one ormore uncertain future events not wholly within the control of the company")

-disclosed as a note only; Seems to me a contingent liability would be a better thing to disclose than just a note?

Am I right or wrong in my thinking?

crispy

Hello,

If the amount involved was material to the accounts, and it was probable that the company would lose the case and pay charges - I would include a provision in the accounts based on the information that I had at that time.

Bluewednesday

I disagree with your reasoning, I think all 3 cases are met for a provision to be made.

I would say that there is a present obligation from a past event. As it is probably i,e, over 50% sure they will lose the case the obligation existed from an event that occured previously.

I would also say there is an estimate of costs simply because the question states the probable future outflow - this suggests to me that the costs are known.

Maybe I'm wrong but I would definitely make a provision.

davejvh

@crispy and @bluewednesday

thanks for your opinions guys You explained your reasoning better than my tutor could!