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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Dunmore Co is sued by a customer for $400,000. After the reporting date but before the financial statements are authorised for issue, the court rules that Dunmore must pay the customer $350,000. The lawsuit was started before the year end and no provision or disclosure was made at the reporting date. What is the correct treatment in the year-end financial statements?

Dunmore should recognise a provision of $350,000 as an adjusting event. The court ruling after the reporting date provides evidence of an obligation existing at the year end, so IAS 10 requires adjustment at the settled amount, not the $400,000 originally claimed.

  1. ADisclose a non-adjusting event of $350,000 only
  2. BRecognise a provision of $400,000
  3. CRecognise a provision of $350,000 as an adjusting eventCorrect
  4. DMake no entry because the ruling occurred after year end

Explanation

A court case settled after the reporting date normally confirms an obligation that existed at the year end, so it is an adjusting event under IAS 10. The liability is recognised at the settled amount of $350,000. The claimed $400,000 is not used, and non-adjusting treatment would be wrong.

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