Skip to content

ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Which of the following is a contingent liability rather than a provision under IAS 37?

A possible obligation confirmed only by an uncertain future event outside the entity's control is a contingent liability. Warranty repairs and legal clean-up duties are present obligations with probable outflows, so they are provisions under IAS 37 and are recognised in the financial statements.

  1. AAn obligation to repair goods under warranties, based on past experience of claims
  2. BA present obligation to pay a fine that is probable but cannot be reliably measured
  3. CA legal obligation to clean up land contamination that has already occurred
  4. DA possible obligation that will be confirmed only if a future uncertain event occurs outside the entity's controlCorrect

Explanation

A contingent liability is a possible obligation whose existence depends on uncertain future events not wholly within the entity's control. It can also be a present obligation not recognised because outflow is not probable or cannot be measured reliably. Warranty and contamination obligations are present obligations with probable outflows, so they are provisions. The fine option is a wrongly framed distractor in that it is described as probable, and the loose phrase about measurement does not fit the tested definition as cleanly.

Did you get it right without looking?

One question tells you little. A timed set on Provisions and contingencies shows your real accuracy, how long you take and where you lose marks.

Practise Provisions and contingenciesFree diagnostic mock

More Provisions and contingencies questions