Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a company is being sued by a customer. Its lawyers advise that it is possible, but not probable, that the company will lose the case. How should this be treated?

Correct answer: B) Disclose a contingent liability in the notes, without recognising a provision

Explanation

A provision is recognised only when there is a present obligation from a past event, an outflow of resources is probable and a reliable estimate can be made. Here an outflow is only possible, so no provision is recognised. Instead, a contingent liability is disclosed in the notes, unless the possibility of an outflow is remote, in which case nothing is disclosed.