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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

At 31 December, Orla Co faces a lawsuit. Before the financial statements are authorised on 15 March, the court rules against Orla for $120,000. The lawsuit arose from an event occurring in October, and at 31 December Orla had treated it as a contingent liability only. What is the correct treatment in the year-end financial statements?

Orla should recognise a provision of $120,000 in the year-end statements. The post-period court ruling confirms an obligation that existed at the reporting date, making it an adjusting event rather than a mere contingent liability disclosure.

  1. AContinue to disclose a contingent liability only
  2. BRecognise a provision of $120,000 as an adjusting eventCorrect
  3. CDisclose the $120,000 as a non-adjusting event
  4. DRecognise the $120,000 in the next year only

Explanation

The court ruling after the reporting date provides evidence of a condition that existed at the reporting date, so it is an adjusting event under IAS 10. Orla recognises a provision of $120,000 (debit expense, credit provision). Treating it as non-adjusting would wrongly leave the liability unrecognised.

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