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ACCA Applied Knowledge · Financial Accounting · Events after the reporting period

At 31 March 20X6 Delta Co had a legal claim against it, and the directors had disclosed a contingent liability because an outflow was considered only possible. On 15 May 20X6, before the financial statements were authorised, the court ruled that Delta must pay damages of $90,000 for an incident that occurred in January 20X6. Delta's lawyers are certain the amount is reliable. Which treatment is correct in the year ended 31 March 20X6?

Delta should recognise a $90,000 provision and charge it to profit or loss for the year to 31 March 20X6. The court ruling after the year end confirms an obligation arising from a January 20X6 incident, so it is an adjusting event.

  1. ARecognise a provision of $90,000 and charge it to profit or lossCorrect
  2. BContinue to disclose a contingent liability only
  3. CRecognise the $90,000 in the year ending 31 March 20X7
  4. DDisclose it as a non-adjusting event with the estimated financial effect

Explanation

The incident occurred before the reporting date, so the obligation existed at the year end and the court ruling confirms it. This is an adjusting event, requiring a provision of $90,000 with a charge to profit or loss. Continuing with a contingent liability or treating it as non-adjusting ignores that the obligation existed at the reporting date.

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