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Hi sir, I seem to be having a lot trouble with figuring out when provisions should be recognized.
Question) On 7January 20X5, Felix was informed that it was being sued by an employee in respect of a workplace accident that took place in October 20X4. Legal advisors advise that Felix is certain to lose the case,
Will a provision be recognized at the year ended 31 December 20X4?
Answer: Yes. A provision will be recognized.
But why would a provision be recognized? Felix was only informed that it was being sued by an employee on 7 January 20X5, which is after the year end. Which means at 31 December 20X4, there is no present obligation since Felix was not aware that it was being sued. Is my reasoning correct?
Or it doesn’t matter whether Felix was informed? Could you explain sir ?
That’s a tricky one and it’s no surprise that you are having trouble
The event that causes the potential obligation happened before the year end and thus the notification brings greater certainty to a condition or situation that DID exist as at the year end
However, would that obligation have existed even though the employee had, for example, chosen not to pursue any legal claim
And would that therefore mean that Felix would have to provide an amount ‘just in case an injured employee eventually decided, 3 months after suffering an accident at work to take legal action’?
And is the amount at all reliably measured?
Certainly not according to the information that you have provided
So, without reliable measurement, a provision is hardly appropriate. It’s more a situation for a disclosure note of a contingent liability
What if the financial statements had been prepared and published and distributed and accepted at the AGM and THEN the employee decides to take legal action?
Should Felix have anticipated this within their 31 December financial statements?
I’m leaning more and more towards disclosure note and further and further away from provisioning
OK?
Actually they also provided the following information,
Estimated payout
$1 million Probability : 30%
$2 million Probability : 60%
$3 million Probability : 10%We got to use the expected value method to calculate the amount of provision right ?
So in fact since the potential obligation (workplace accident) arose before the year end, and a reliable estimate can be of the amount of obligation, and it is probable that a outflow of resources from Hermione is required to settle the obligation , a provision is required right?
Is it some perverted delight that you take from asking me questions without giving me full information?
Questions are always very carefully worded and there are few words within any question that can safely be ignored
That information about probabilities of outcome is vital information and absolutely necessary for a considered response … yet you chose to withhold it from me
Yes, a provision is required and is calculated as ($1 x 30% + $2 x 60% + $3 x 10%) $1,800,000
Please get used to the idea of giving me full information!
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