Question

ASN Corporation is in the process of preparing its financial statements for the current fiscal year end.

For each of the following independent situations, indicate (yes or no) whether ASN should recognize a contingency for the situation under ASPE. Next, assume that ASN follows proposed IFRS for the same situations, and indicate (yes or no) whether ASN should recognize a liability for each situation.

		Independent Situation		ASPE		IFRS
a)		ASN Corporation operates an oil refinery in Oklahoma, an area prone to strong tornados. The current net book value shown on ASN’s books for the refinery and the associated land is $6,500,000.		Yes/No		Yes/No
b)		ASN Corporation uses DAW Installations to install some of its products. On one project, DAW did a poor job and damaged the customer’s facility. ASN has filed a lawsuit against DAW for damages in the amount of $40,000. DAW is contesting the suit and the case has yet to determine the merits of the claim.		Yes/No		Yes/No
c)		One of ASN’s customers has telephoned to complain about one of ASN’s products. The customer is angry about some alleged manufacturing defects and has threatened to sue ASN for $100,000. So far, no lawsuit has actually been filed.		Yes/No		Yes/No
d)		During the year, another company (LTN, Inc.) asked ASN to act as a guarantor so that LTN could obtain a $5,000,000, 5-year loan from the bank, in exchange for a fee. If LTN defaults on the loan in any way, ASN would be required to repay the bank on LTN’s behalf. To date, LTN has made all required payments on the loan and the probability of having to make a payment to the bank relating to the guarantee is remote.		Yes/No		Yes/No
e)		CTZ Ltd., a competitor of ASN’s, has filed a lawsuit against ASN for $500,000. ASN’s attorneys have reviewed the lawsuit and believe that, although CTZ has a valid case, the suit can be settled out of court for $350,000.		Yes/No		Yes/No

Answer 1

Situation	ASPE	IFRS
A	No	Yes
B	Yes	No
C	Yes	Yes
D	No	Yes
E	No	Yes

• Contingencies are created when the future event is uncertain and when we can't classify whether it is a loss or income
• Liability is recognized when we expect future loss.According to prudence concept only future losses are recognised but not profits

Answer 2

Answer 3

No No

No No

No No

No Yes

Yes Yes