Question

Electronic Innovators is the defendant in a $10 million lawsuit filed by one of its customers, Aviation Systems. The litigation is in final appeal, and legal counsel advises that it is probable that Electronic Innovators will lose the lawsuit. The estimated amount is somewhere between $6 and $10 million. Which of the following statement(s) are true? (Select all that apply.) Check All That Apply A loss and a liability must be recorded for $6 million. A loss and a liability must be recorded for $10 million A disclosure note should be included for a range of $6 and $10 million to the financial statements with an entry for the minimum amount. A disclosure note should be included for a range of $6 and $10 million to the financial statements with an entry for the maximum amount.

Answer 1

As per the IAS 37, a provision should be made iff,

1) a present obligation has arisen as a result of a past event,

2) payment is probable ('more likely than not') and

3) the amount can be estimated reliably.

In the given case,

a) the present obligation (Liability to pay the suit amount) exists because of the past event (filing of law suit by the customer).

b) Since the counsel estimates that it is probable that the company may lose the suit, payment of the amount is probable

c) Since tha outlow is estimated to be between $6 to $10 million, a reliable estimate could be made.

Hence, a provision should be created for the maximum amount of $10 along with a disclosure.

Correct answer is OPTION 4 : A disclosure not should be included for a range of $6 and $10 mn to the financial statements with an entry for maximum amount.