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ACCA Strategic Professional · Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period

Kestrel Ltd is defending a claim for damages brought by a customer. Kestrel's lawyers advise that it is possible, but less likely than not, that the court will find against the company, and a reliable estimate of the amount could be made. How should Kestrel treat the claim in its financial statements under IAS 37?

Kestrel should disclose a contingent liability and recognise no provision. The outflow is possible but not probable, so the recognition criteria in IAS 37 are not met, yet the possibility is not remote, so disclosure of the nature and estimated financial effect is required.

  1. ARecognise a provision at the best estimate of the amount
  2. BDisclose a contingent liability and recognise no provisionCorrect
  3. CRecognise a contingent asset for the insurance recovery
  4. DMake no disclosure because the outcome is not probable

Explanation

A provision requires an outflow to be probable (more likely than not). Here the outflow is only possible, so there is no provision. IAS 37 requires disclosure of a contingent liability unless the possibility of outflow is remote. Making no disclosure would be wrong because the outflow is not remote.

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