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Hi, I need some clarification regarding the difference between a provision and a contingent liability.
In the contingent liability definition at the start of the IAS 37 lecture notes it says:
“For example, the company may have been taken to court, but the outcome of the case is not yet known. If they lose the case then they may have to pay a fine. There is therefore a potential liability, but it is not certain. The question is as to whether or not we show the potential liability in the accounts”However, lower down when talking about reporting contingent liabilities it also says:
“But, if a past event has given rise to the possible obligation (for example, a lawsuit) then it is treated as a provision.”So, if a lawsuit (court case) would be reported as a provision in the financial statements can you give me an example of a contingent liability which would actually be reported as a contingent liability in the financial statements?
I just want to make sure I have things clear, thanks!
Contingent liabilities (such as the law suit) only appear in the financial statements if the payment is probable, in which case they appear as a provision.
If the payment is not probable (i.e. less that a 50% chance) then the law suit will not appear in the financial statements, but instead will be disclosed as a note to the statements (unless it is remote i.e. less that 5% chance, in which case it appears nowhere).
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