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ACCA Strategic Professional · Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period

At 31 December 20X5, Kestrel Co has a legal case brought against it by a customer. Its lawyers advise that it is more likely than not that Kestrel will lose and that a payment of $2 million will be required. Kestrel's financial statements are authorised in March 20X6. What is the correct treatment at 31 December 20X5 under IAS 37?

Kestrel should recognise a provision of $2 million. The past event gives a present obligation, an outflow is probable because loss is more likely than not, and the amount can be estimated reliably, so all IAS 37 recognition criteria are met.

  1. ADisclose a contingent liability only, because the outcome is not certain
  2. BRecognise a provision of $2 millionCorrect
  3. CRecognise a contingent asset of $2 million
  4. DMake no recognition or disclosure, because the case is not yet settled

Explanation

A provision is recognised when there is a present obligation from a past event, an outflow is probable (more likely than not), and a reliable estimate can be made. The lawyers' advice satisfies all three conditions. Disclosure only would apply if the outflow were merely possible.

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