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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Zeta Co is defending a lawsuit brought by a customer. Its lawyers advise that it is possible, but not probable, that Zeta will lose and have to pay damages, and the amount can be estimated reliably. How should Zeta treat this under IAS 37?

Zeta should disclose a contingent liability in the notes. The outflow is possible but not probable, so the recognition criteria for a provision are not met, and IAS 37 requires disclosure unless the chance of payment is remote.

  1. ARecognise a provision in full
  2. BDisclose a contingent liability in the notesCorrect
  3. CRecognise a contingent asset
  4. DMake no disclosure because the outflow is not probable

Explanation

Under IAS 37 a possible obligation, where an outflow is possible but not probable, is a contingent liability. It is disclosed in the notes rather than recognised. A provision requires a probable outflow. No disclosure is only appropriate if the outflow is remote.

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