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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Marlow Co is a defendant in a lawsuit. Its lawyers advise that the company will probably lose and that the most likely damages are $60,000, though the range of possible outcomes is $40,000 to $90,000. Legal fees to the date are already paid. How should Marlow treat the case at the year end?

Marlow should recognise a provision of $60,000. The loss is probable, so IAS 37 requires a provision, and for a single obligation the best estimate is the most likely outcome rather than the maximum or the midpoint of the range.

  1. ARecognise a provision of $60,000Correct
  2. BRecognise a provision of $90,000
  3. CRecognise a provision of $65,000, the midpoint
  4. DDisclose a contingent liability only

Explanation

Loss is probable, so a provision is required. For a single obligation, the most likely outcome is the best estimate, $60,000. The maximum and midpoint are not used for a single item, and disclosure only would apply if the outflow were merely possible.

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