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You have been informed that the financial controller left Sampson Co on 28 February 20X5. As part of the subsequent events audit procedures, you reviewed post year?end board meeting minutes and discovered that a legal case for unfair dismissal has been brought against Sampson Co by the financial controller. During a discussion with the Human Resources (HR) director of Sampson Co, you established that the company received notice of the proposed legal claim on 10 April 20X5.
maam this is an adjusting event, right? because new evidence(legal claim of $0.15m) becomes aviable about condition that existed at reporting date(he was ousted before the yr end) .
I know this is a super super silly question and one from F3. but just wanted to confirm it.
…. you fail to mention the all important reporting date!
Let’s assume it is 31 March 20X5.
There are two possibilities – there was a present obligation at the reporting date because the employee had de facto been dismissed before the year end – there was no present obligation at the reporting date in the absence of a claim.
This is what IAS 37 has to say:
“In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the end of the reporting period. An entity recognises a provision for that present obligation if the other recognition criteria described above are met [i.e. probable outflow of resources and reliable estimate]. If it is more likely than not that no present obligation exists, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.”
In the scenario you give, I would therefore go for disclosure of contingent liability per IAS 37 – i.e. it doesn’t have to be classified as adjusting/non-adjusting per IAS 10.
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