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

Zenith Ltd is defending a lawsuit claiming damages of $2 million for alleged product defects. Its legal advisers believe it is possible, but not probable, that the claim will succeed. Under IAS 37, how should Zenith treat the claim in its financial statements for the year ended 31 December 20X5?

Zenith should disclose a contingent liability and recognise no provision. A possible but not probable outflow does not meet the IAS 37 recognition threshold, but disclosure is still required because the outflow is not remote.

  1. ARecognise a provision for $2 million
  2. BRecognise a provision for $1 million, being the midpoint of the possible range
  3. CDisclose a contingent liability and recognise no provisionCorrect
  4. DMake no disclosure because the outcome is not probable

Explanation

IAS 37 requires a provision only where an outflow is probable. Where an outflow is possible, an entity discloses a contingent liability unless the likelihood is remote. Recognising a provision or a midpoint amount would be wrong, and omitting disclosure is only allowed if the outflow is remote.

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