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What is the appropriate treatment in the F/S if it is probable that an event that occurred before the period end will give rise to an outflow of resources?
– Disclose details in the notes
– Establish a provision for the amount
– No adjustment or disclosure are require
– Set up a contingent liabilityFor my answer I picked set up a contingent Liability but that is wrong as the answer states Establish a provision for the amount.
According to the notes if the outflow is probable it is recognized in the financial statement.
My questions are:
– I am confuse as to the difference between (1) establish a provision for the amount and (2) set up a contingent liability.– if the question had stated that the outflow was after the period end what would have been the outcome for this situation.
thanks
Contingent liability is the term given to something that happened before year end but whose impact will not be known until something that occurs after year end.
Contingent liabilities can have threee treatments depending on how likely it is that there will be a transfer of funds:
If only a remote possibility – ignore
If possible – disclose in notes
If probable set up a provision.The 4th option in your question is wrong because there is no way to set up a global contingent liability: you either ignore, disclose or set up a provision.
With contingent liabilities the outflow, if there is one, would always be after year end – otherwise it is simply an expense, not a liability.
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