Content Error: Study hub hypocrisy

Hi , I am a lot confused about study hub treatment of legal costs related to IAS 37.

I found two similar scenerios but just opposite answers.

The first scenerio is from Study Questions Ch 3 : question 2 ‘CANDEL’

Scenerio:-
(iii) Breach of contract
Candel Co is being sued by a customer for $2m for breach of contract over a cancelled order. Candel Co has obtained legal opinion that there is a 20% chance that Candel Co will lose the case. Accordingly, Candel Co has provided $400,000 ($2m x 20%) included in administrative expenses in respect of the claim. The unrecoverable legal costs of defending the action are estimated at $100,000. These have not been provided for as the legal action will not go to court until next year.

Solution:-
Tutorial note : As the outcome of the legal action against Candel is considered unlikely to succeed (only a 20% chance) it is inappropriate to provide for any damages. The potential damages are an example of a contingent liability which should be disclosed (at $2m) as a note to the financial statements. The unrecoverable legal costs are a liability (the start of the legal action is a past event) and ‘should be provided for in full.’

The second scenerio is from Study Questions Ch 15 : ‘ROVERS’ (b) .

Scenerio:-

(b) Provision/Contingent liability

An ex-director of the company has commenced an action against the company claiming substantial damages for wrongful dismissal. The company lawyers have advised that the ex-director is unlikely to succeed with his claim. The lawyers’ potential liabilities are:

– legal costs (to be incurred whether the claim is successful or not) = 50

settlement of claim if successful = 500

At present there is no provision or note relating to this claim.

(4 marks)

Solution:-

(b) Provision/Contingent liability

IAS 37 defines a provision as a liability of uncertain timing or amount and a contingent liability as either a possible obligation which will be confirmed only by the occurrence or non-occurrence of a future event or a present obligation that is not recognised because it is unlikely that there will be an outflow of future economic benefits or the amount of the obligation cannot be measured reliably.

Lawyers have advised that the claim for wrongful dismissal is unlikely to succeed and therefore there is no present obligation and so a provision cannot be recognised. This is therefore a contingent liability and there is a possible obligation. It should be disclosed unless payment is considered remote. This may be the case given that the claim is “unlikely” to succeed.

The legal costs are to be incurred whatever the outcome of the case. Those costs that have already been incurred should be recognised as an accrual as Rovers has an obligation to pay them. ‘Any future legal costs are not recognised as an expense or a liability as they are not yet incurred.’