ACCA FA · Chapter 8 · Question 2 of 10
A customer has started legal action against a company. The company's lawyers advise that it is possible, but not probable, that the company will lose the case and pay damages of about $90,000. How should this be treated in the financial statements?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Disclose a contingent liability in the notes
Explanation
Where an outflow is possible but not probable, there is no provision. Instead, a contingent liability is disclosed in the notes, describing the nature of the claim and an estimate of its financial effect. No disclosure is needed only if the possibility of an outflow is remote.
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