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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

At 31 December, Orion Co has guaranteed a bank loan of a subsidiary-independent third party. Which of the following situations would lead Orion to disclose a contingent liability rather than recognise a provision or make no disclosure?

Orion discloses a contingent liability when payment under the guarantee is possible but not probable. A probable, measurable payment would require a provision, a remote chance needs no disclosure, and a payment already made is already recorded.

  1. APayment under the guarantee is probable and can be measured reliably
  2. BPayment under the guarantee is remote
  3. CPayment under the guarantee is possible but not probableCorrect
  4. DThe guarantee has already been called and paid before the year end

Explanation

A guarantee where payment is possible but not probable gives a possible obligation and is a contingent liability, so it is disclosed. A probable and measurable payment needs a provision. A remote chance requires no disclosure. A payment already made is simply an expense or loss already recorded.

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