ACCA Applied Knowledge · Financial Accounting · Events after the reporting period
Delta Co has a year-end of 31 March 20X6. At that date it disclosed a contingent liability for a lawsuit, with no provision, as the outcome was uncertain. On 10 May 20X6, before the financial statements were authorised, the court ordered Delta to pay $150,000 for an incident occurring in January 20X6. Delta's lawyers confirm the amount is final. Profit before this was $500,000 and no tax effects apply. Which treatment is correct?
Delta should recognise a $150,000 provision, reducing profit to $350,000. The incident happened before the year-end and the court ruling after it confirms the obligation and amount, so it is an adjusting event under IAS 10.
- ADo not adjust, disclose the $150,000 as a non-adjusting event; profit remains $500,000
- BCreate a provision of $150,000, giving profit of $350,000Correct
- CIgnore, and recognise the cost in the year ending 31 March 20X7, giving profit of $500,000
- DCreate a provision of $150,000 and also disclose a contingent liability, giving profit of $200,000
Explanation
The incident occurred before the year-end, so the obligation existed at the reporting date. The court ruling settles the amount, so it is an adjusting event. Recognise a provision of $150,000, reducing profit to $350,000. Treating it as non-adjusting or deferring it is wrong, and double counting by also disclosing a contingent liability is not appropriate.
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