CAF-6 · Chapter 1 · Question 10 of 15
An entity is facing a lawsuit. The entity's legal counsel advises that the probability of losing the case and paying damages is 'possible' but not 'probable'. How should this matter be treated in the financial statements?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Disclose the matter as a contingent liability.
Explanation
If the outflow of economic benefits is possible (but not probable), no provision is recognized. Instead, the matter must be disclosed as a contingent liability unless the probability of an outflow is remote.
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