Question

The following selected circumstances relate to pending lawsuits for Erismus, Inc. Erismus’s fiscal year ends on December 31. Financial statements are issued in March 2019. Erismus prepares its financial statements according to IFRS.
  
Required:
Indicate the amount Erismus would record as an asset, liability, or not accrued in the following circumstances.

1. Erismus is defending against a lawsuit. Erismus's management believes the company has a slightly worse than 50/50 chance of eventually prevailing in court, and that if it loses, the judgment will be $1,500,000.
2. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages could fall anywhere in the range of $2,500,000 to $4,500,000, with any damage in that range equally likely.
3. Erismus is defending against a lawsuit. Erismus's management believes it is probable that the company will lose in court. If it loses, management believes that damages will eventually be $5,500,000, with a present value of $4,000,000.
4. Erismus is a plaintiff in a lawsuit. Erismus's management believes it is probable that the company eventually will prevail in court, and that if it prevails, the judgment will be $1,500,000.
5. Erismus is a plaintiff in a lawsuit. Erismus’s management believes it is virtually certain that the company eventually will prevail in court, and that if it prevails, the judgment will be $750,000.

Answer 1

Ques 1
liabiltiy:1,500,000
Erismus would recognize a liability of $1,500,000, as IFRS defines “probable” as “more likely than not” (>50%), and it is more likely than not to lose in court.

Ques 2
liabiltiy:3,500,000
Erismus would recognize a liability of $3,500,000, as it is more likely than not to lose in court, and IFRS requires that they take the midpoint of the range of equally likely outcomes. There will also be note disclosure of the lawsuit.

ques 3.
liabiltiy:4,000,000
Erismus would recognize a liability of $4,000,000, as it is more likely than not to lose in court, and IFRS requires that they take the present value of future outcomes if time­value­of­money effects are material. There will also be note disclosure of the lawsuit.

ques 4.
Not accrued
This is a gain contingency. Gain contingencies are accrued under IFRS when the gain is virtually certain and reasonably estimable. Because this gain is only probable, the gain would not be recognized. Instead, the gain should be recognized only when realized. A disclosure note is appropriate.

ques 5.
Asset:750,000
This is a gain contingency. Gain contingencies are accrued under IFRS when the gain is virtually certain and reasonably estimable. Erismus would recognize a gain of $750,000 , recorded at present value if the