Q1 (B) March/June 2017 – Scenario 1 – Provision or Contingent Liability

Hello,

My question relates to Q1(B) March/June 2017 – Scenario 1. The scenario states that Diamond has given a guarantee to pay 9% of each receivable which is not recovered within 6 months. Diamond believes the probability of default is very low. The fair value of the guarantee is $50,000.

I initially felt this matter was best reported as a contingent liability. It doesn’t appear that a provision of $50,000 is required, as Diamond believes the probability of default to be very low, and hence not “more likely than not” which is required for a probable outflow of economic benefits. As there is a present obligation (guarantee given) but a probable outflow of economic benefits does not exist, i concluded the matter should be disclosed as a contingent liability.

The model ACCA answer, says the guarantee should be treated as a separate financial liability as per IFRS 9. It would be measured at its fair value of $50,000.

So, my question is, given that the outflow of economic benefits is not probable (i.e. more likely than not) then why recognize it as a liability?

Thanks
Liam