CAF-8 · Chapter 10 · Question 2 of 10
An auditor is reviewing the 'Contingent Liabilities' of a company. A major lawsuit against the company is deemed 'Possible' but not 'Probable' by the legal counsel. What is the correct accounting treatment?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Disclose the matter in the notes to the financial statements.
Explanation
If an outflow is possible (but not probable), it is a contingent liability. According to IAS 37, contingent liabilities are disclosed in the notes, not recognized in the financial statements.
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