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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Kaveri Textiles Ltd. has a dispute with a supplier. A court case is pending, and the company's lawyers say an outflow of Rs 8 lakh is probable and can be estimated reliably. Under the Framework, which of the following correctly describes the treatment of this item in the financial statements?

A liability of Rs 8 lakh should be recognised, because there is a present obligation from a past event, the outflow is probable and the amount is reliably measurable. Recognition criteria are satisfied, so note-only disclosure or waiting for the court order is not appropriate.

  1. ARecognise a liability of Rs 8 lakh because it is a present obligation arising from a past event with a probable outflow that can be measured reliablyCorrect
  2. BDisclose only as a note since the case is not yet decided
  3. CRecognise it as an asset since the outcome will be settled in future
  4. DIgnore it until the court gives its final order

Explanation

A liability is recognised when it is probable that an outflow of resources will result from settlement of a present obligation and the amount can be measured reliably. Both conditions are met here. Mere disclosure, as in the second option, applies to possible or unmeasurable obligations.

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