Question

In: Accounting

Jackson owns a building where he rents to tenants. Robertson is suing Jackson for 350,000 for...

Jackson owns a building where he rents to tenants. Robertson is suing Jackson for 350,000 for an injury he sustained while living in the building. The attorneys performed estimates of the value of the lawsuit and outcomes below: Based upon the facts and potential outcomes below; how will Jackson handle each probability.

A, Assume it is likely that Jackson will win the lawsuit with the amount being 240,000

B. Assume it probable that Jackson will settle the lawsuit for an amount between 300K-500K

C. Assume it is reasonably possible that Jackson will settle the lawsuit for $375,000.

D, Assume it is remote that Jackson will lose the lawsuit

E. Assume it is probable that Jackson will settle the lawsuit but the amount cannot be estimated.

Solutions

Expert Solution

The mentioned problem deals with the aspect of recognition of Provisions and contingencies upon a contingent event, the monetary value of which is based on probability. IAS 37 Provisions, Contingent Liabilities and Contingent Assets provides a framework for on part of accounting for provisions dealing with liabilities of uncertain timing or amount alongwith with contingent assets or in other probable assets and contingent liabilities or in other words probable liabilities and present obligations which certain and not probable or not measured reliably.

Amount of Provisions to be recognised are measured at best possible estimate which includes risks and uncertainties involved in relation to the expenditure required to settle the present set obligation thus reflecting upon the present value of expenditures required to be incurred to settle the obligation.

A positive outcome, even though 100% sure, should not be given effect to in financial statements

Dealing with the present set of situations;

A - Assume it is likely that Jackson will win the lawsuit with the amount being 240,000

NO effect to be given in financial statements as the same shall not be effecting any accounting record

B. Assume it probable that Jackson will settle the lawsuit for an amount between 300K-500K

A financial disclosure, narrating the set of events in relation to this lawsuit and mentioning the analysis/ opinion of lawyer should form part of notes to accounts. Further the amount of bracket providing the possible flow of funds i.e. 300000 – 500000 alongwith, probability, should be mentioned in notes to accounts.

C. Assume it is reasonably possible that Jackson will settle the lawsuit for $375,000.

A financial disclosure, narrating the set of events in relation to this lawsuit and mentioning the analysis/ opinion of lawyer should form part of notes to accounts. Further the amount of possible flow of funds i.e. 375000 alongwith, should be mentioned in notes to accounts.

D. Assume it is remote that Jackson will lose the lawsuit

A financial disclosure, narrating the set of events in relation to this lawsuit and mentioning the analysis/ opinion of lawyer should form part of notes to accounts. Even if chances are remote it a disclosure cannot be avoided and should be mentioned in notes to accounts.

E. Assume it is probable that Jackson will settle the lawsuit but the amount cannot be estimated.

A financial disclosure, narrating the set of events in relation to this lawsuit and mentioning the analysis/ opinion of lawyer should form part of notes to accounts. Further the amount of bracket providing the possible flow of funds, if possible, alongwith, should be mentioned in notes to accounts.

ekkarill92 answered 1 year ago
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