ACCA Applied Knowledge · Financial Accounting · Disclosure notes
Doran Co's year end is 31 March 20X6 and its financial statements were authorised on 30 June 20X6. A court case was pending at the year end and no provision was made because an outflow was thought unlikely. On 10 May 20X6 the court ordered Doran to pay damages of $90,000 in respect of an incident in 20X5. What is the correct treatment in the financial statements for the year ended 31 March 20X6?
Doran should recognise a provision of $90,000. The court ruling after the year end confirms that a present obligation existed at 31 March 20X6 from the 20X5 incident, so it is an adjusting event rather than a mere disclosure.
- ADisclose a contingent liability only
- BMake no adjustment or disclosure because the order was made after the year end
- CRecognise a provision of $90,000Correct
- DDisclose the $90,000 as a non-adjusting event only
Explanation
The settlement of a court case after the reporting date confirms an obligation that existed at the year end, so it is an adjusting event. A provision of $90,000 is recognised. Disclosure only would be the treatment for a non-adjusting event.
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