ICANFinancial AccountingAccruals, Prepayments and Provisions2023

Zubair Manufacturing Plc is being sued by a former employee for wrongful dismissal. The company's legal counsel estimates a 65% probability that the company will lose the case and be required to pay damages of ₦12,000,000. In accordance with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, how should this matter be treated in the financial statements?

ADisclose as a contingent liability only, since no cash has been paid
BRecognise a provision of ₦12,000,000 and disclose the nature of the obligationCORRECT
CIgnore the matter entirely until the court delivers its judgment
DRecognise a provision of ₦7,800,000 being 65% × ₦12,000,000
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Why the answer is B, and why the others tempt you.
Under IAS 37, a provision is recognised when: (i) there is a present obligation as a result of a past event, (ii) it is probable (more likely than not, i.e., >50%) that an outflow of resources will be required, and (iii) a reliable estimate can be made. A 65% probability satisfies the 'probable' threshold. The full best estimate of ₦12,000,000 is recognised as the provision (not the probability-weighted amount, unless a range of outcomes exists). Option D incorrectly applies expected-value weighting to a single-outcome estimate.
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