Question

In general, a contingency can be defined as an existing condition or situation that is uncertain, where it cannot be known if a loss (and a related liability ) will result from the situation until one or more future events happen or do not happen.

There are three different approached that can be taken with contingencies:

1 recorded (or recognized)as a liability.

2 disclosed ( in the notes to the financial statements) and

3 not recorded or disclosed.

Scenario

Betteries4U was a manufacturer of batteries, portable lighting, and personal care products.

a.Year1(2009): it was identified as a "potentially responsible party" by a government environmental protection agency and told they might have to share in the cost of an environmental cleanup. Litigation was started. Batteries4U thought the probable outcome would be unfavorable.

b. Year2(2010): Batteries4U was able to reasonably estimate the cost of the clean-up.

What would be your approach in each year? Please provide your explanation.

Answer 1

Answer – (a) As per IAS- 37 Provisions, contingent liabilities and contingent assets, there are three different type of situation, where   organization should make provision, or contingent liability disclosure or no provision and no disclosure require. Following are situation and there accounting treatment-

1.         If there is possible obligation or a present obligation but likelihood of an outflow of resources is remote than origination require not provision reorganization and not disclose of contingent liability as note to accounts.

2.         If there is a possible obligation or a present obligation that may but probably will not, requires an outflow of resources then origination not require provision reorganization but require disclose of contingent liability as note to accounts in financial statement.

3.         A past event occurred which has resulted in a present obligation that probably requires an outflow of resources than organization requires to make provision for it and also disclosures are required for provision.

(a) in year 2009, litigation was started for share in the cost of an environmental cleanup and Batteries4U through the probable outcome would be unfavorable then there is possible obligation may but probably will not, require an outflow of resources. So Batteries4U not require making provisions/record as liability but requiring disclosure contingent liability in note to the financial statements.

Answer (b) Batteries4U was able to reasonable estimate the cost of the clean-up. Than it is a past event occurred which has resulted in a present obligation the probably requires an outflow of resources than Batteries4U organization require to make provision/record as liability for it and also disclosures are required for provision/recorded liability in note to the financial statements.