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A company is being sued by a customer for 400,000. the amount involved is material. chances of losing are 70%. the company shares are traded on the stock exchange.
How shd this case be reported in the annual report and financial statements.
—- 70% means probable, thus it is a provision. correct?
—- in the answer it says this shd be treated as an “actual liability”
i dont quite get it.
Yes – it is probable, and therefore there should be a provision in the financial statements.
A provision here is effectively exactly the same as making an accrual. We only call it a provision because the amount cannot be stated with certainly.
So, just as with making an accrual, making a provision for this is effectively showing it in the statements as a liability.
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