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The solution to the bpp book for chapter 9 on IAS 37 Gives an example of legal case the company has not received notice of legal proceedings but lawyers advice it’s highly likely that patient relatives will start legal proceedings the answer recognizes that there is a present obligation how come??? The company has not yet received notice…
Do you accept that there is a contingency facing the company in the form of potential claims from relatives? Presumably the company has done something or made something that has caused / contributed towards the death of some of the company’s customers so, although this has only recently been shown / discovered / made known and no-one has yet thought about making a claim against the company, can you accept that there is a chance that they will?
Assuming that your answer to my question above is “Yes”, now we have established an obligation. It may be simply contingent or it may be rather more than contingent.
Ask yourself “Is it a possible obligation? Will the relatives not realize that they have a claim against us, and no-one will tell them and the whole affair will go away?”
“Or is it a probable obligation?” The company’s legal advisors have told the company that it is “highly likely” that claims will be made.
One more question for you to ask yourself! “What alternative expression could the examiner use other than “highly likely” to indicate to me that this is more than a possible contingent liability? This is a substantially greater than 50% probability!”
Ok?
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