Question

A foreign subsidiary of a U.S.-based company has been notified of a loss contingency with an estimated cost ranging between $220,000 and $250,000 which is probable of resulting in an actual loss. Each dollar amount within this range of cost is equally likely of being the actual outcome.

According to IFRS, what is the amount recognized as a provision for loss contingency?

Multiple Choice

• No amount will be recorded but an amount will be disclosed in the notes to the financial statements.

• $110,000

• $220,000

• $235,000

• $250,000

Answer 1

Answer :- $ 2,35,000

Working:- Since each outcome in the range of $220000 & $250000 is equally likely, take average of the two.

($ 220000+ $ 250000) /2 = $ 235000

Notes:-

IAS 37 defines and specifies the accounting for and disclosure of provisions, contingent liabilities, and contingent assets.

Provisions

A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation. A constructive obligation arises from the entity’s actions, through which it has indicated to others that it will accept certain responsibilities, and as a result has created an expectation that it will discharge those responsibilities. Examples of provisions may include: warranty obligations; legal or constructive obligations to clean up contaminated land or restore facilities; and obligations caused by a retailer’s policy to make refunds to customers.

An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability.

A provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. Risks and uncertainties are taken into account in measuring a provision. A provision is discounted to its present value.