ACCA Applied Knowledge · Financial Accounting · Disclosure notes
Zeta Co is defending a legal claim. Its lawyers advise that it is possible, but not probable, that the company will lose and have to pay damages. A reliable estimate of the amount can be made. How should Zeta Co treat the claim in its financial statements under IAS 37?
Zeta Co should disclose a contingent liability in the notes only. The outflow is possible rather than probable, so the recognition criteria for a provision are not met, but because the chance is not remote, IAS 37 requires note disclosure.
- ARecognise a provision and disclose it in the notes
- BDisclose a contingent liability in the notes onlyCorrect
- CRecognise a contingent asset in the notes
- DMake no disclosure because the outflow is not probable
Explanation
A possible but not probable outflow is a contingent liability. IAS 37 requires disclosure in the notes, not recognition. A provision requires the outflow to be probable, and no disclosure is only appropriate when the chance of outflow is remote.
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