A company is defending one legal claim brought by a single customer. This is a single obligation, not a large population of similar items. Its lawyers advise that the company will probably have to pay damages, and estimate a 60% chance that it will pay $400,000 and a 40% chance that it will pay $100,000. Under IAS 37, at what amount should the provision be measured?

Correct answer: D) $400,000

Explanation

For a single obligation, IAS 37 states that the individual most likely outcome is usually the best estimate. The most likely outcome is paying $400,000 (60% probability), so the provision is $400,000. The expected value of $280,000 ((60% x $400,000) + (40% x $100,000)) is the method for a large population of items, such as warranties, not a single claim. $500,000 adds both outcomes together, and $100,000 is the less likely outcome.