Dear tutor,
I am confused about the calculation of provision when there is a single obligation.
Suppose there is a court case and with the probability of 40% we have to pay $1M and with probability of 60% we have to pay $3M.
Now the provision amount is th expected amount = 1 × 40% + 3 × 60% = $2.2 M
Or
it is the most likely outcome = $3 M
??
Would you please help me on the above matter?
Thank you very much
Ask the Tutor ACCA FR
Calculation of provision
Hi,
It is a single obligation, where we will pay either $1m or $3m. We aren't going to pay anything in between, so we go with the most likely scenario and in this case it is the $3m. We will therefore make a provision for $3m.
Thanks
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