CFA Level I · CFA Level I Exam · Analyzing Balance Sheets
A company's financial statements are prepared under IFRS. A lawsuit has been filed against it, and its lawyers assess the chance of losing as possible but less than probable. The most appropriate treatment is to:
The company should disclose a contingent liability in the notes. Because losing is only possible rather than probable, the recognition threshold under IAS 37 is not met, but the outflow is not remote, so note disclosure is required instead of a balance sheet provision.
- ARecognize a provision for the full claimed amount
- BDisclose a contingent liability in the notesCorrect
- CMake no recognition or disclosure
Explanation
IAS 37 requires a provision only when an outflow is probable. When it is merely possible, the item is a contingent liability that is disclosed in the notes unless the likelihood is remote. Full recognition overstates liabilities, and no disclosure would apply only if the outflow were remote.
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