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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Delta Co's year end is 31 March 20X6. On 15 May 20X6, before the financial statements were authorised, a court ruled that Delta must pay $60,000 damages to a customer over an incident in January 20X6. At 31 March, Delta had disclosed this as a contingent liability, as the outcome was then uncertain. What is the correct treatment in the year ended 31 March 20X6?

Delta should recognise a $60,000 provision as an adjusting event. The incident happened before the year end, and the later court ruling confirms the obligation existed at 31 March, so the contingent liability becomes a recognised liability and expense.

  1. AMake no change because the ruling happened after the year end
  2. BRecognise a provision of $60,000 as an adjusting eventCorrect
  3. CDisclose the $60,000 as a non-adjusting event only
  4. DRecognise the $60,000 in the year ended 31 March 20X7 only

Explanation

The incident occurred before the year end, so an obligation existed at the reporting date. The court ruling after the year end provides evidence of conditions existing at that date, making it an adjusting event under IAS 10. Delta debits expenses and credits provisions with $60,000. Leaving the contingent liability disclosure unchanged would understate liabilities.

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