- This topic has 2 replies, 2 voices, and was last updated 4 years ago by liamcolm.
- You must be logged in to reply to this topic.
Instant Poll - Read and post comments:
Specially for OpenTuition students: 20% off BPP Books for ACCA & CIMA exams – Get your BPP Discount Code >>
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?
You should be looking at IFRS 9 and not IAS 37, and financial liabilities in IFRS 9 are measured at fair value.
Ok. Thank You