Question

Hamilton Airlines is faced with a situation that needs to be resolved before the financial statements for the company's year ended December 31, 2017 can be issued.

The airline is being sued for $5 million for an injury caused to a child as a result of alleged negligence while the child was visiting the airline maintenance hangar in March 2017. The suit was filed in July 2017. Hamilton's lawyer states that it is likely that the airline will lose the suit and be found liable for a judgement costing anywhere from $600,000 to $3 million. The lawyer adds that the expected value of the cost could be calculated to be $1,200,000.

1. Prepare the journal entries and disclosures (if any) required for the Dec 31, 2017 financial statements assuming that the firm follows IFRS.

2. Prepare the journal entries and disclosures (if any) required for the Dec 31, 2017 financial statements assuming that the firm follows ASPE.

Answer 1

Answer-1:

As per IFRS, the firm will have to disclose it because it is likely that the firm will lose the suit, resulting in a higher probability than more likely than not. Since, it is measurable the firm have to accrue a provision for the expected value, which is $1,200,000

Law suit expense	1,200,000
Accrues lawsuit liability		1,200,000

Answer-2:

As per ASPE, as it is likely that the firm will lose the suit they have to disclose it. A contingency liability has to be accrued, if it is measurable, at the lower value of the range if no specific number is chosen as the most probable. In this case it will be $600,000

Law suit expense	600,000
Accrues lawsuit liability		600,000