Question

Part 3 Contingent liabilities. (10 points possible) Below are three independent situations. 1. In August, 2020 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Simon Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000. 2. A suit for breach of contract seeking damages of $1,200,000 was filed by an author against Eller Co. on October 4, 2020. Eller's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $300,000 and $900,000. No amount within this range is a better estimate of potential damages than any other amount. 3. Pratt is involved in a pending court case. Pratt's lawyers believe it is probable that Pratt will be awarded damages of $1,500,000. Instructions Discuss the proper accounting treatment for the 2020 year, including any required disclosures, for each situation. Give the rationale for your answers.

Answer 1

As per IFRS - 37 / IAS 37 which specifically deals with the provisioning of any liaility which has occurred from past event, which are probable that leads to outflow of econoimc benefit and estimate is reasonably certain,

Situations	Accounting Treatment as per Accountig Standard	Explanation
1	Record the Provision in Books and disclosure of such legal suit in notes to accounts of the financial statements.	Here, rolling out the situation, the factory worker has injured, as per Legal Advise it is reasonable certain about the outflow of resources plus estimation of liability is still uncertain, but as per IFRS -37 which emphasis on best estimation of the liability, hence in said case, the estimate to the best is required by management to determine other factors for its estimation, as on avergae estimation which is best is 500000$. Hence itis required to provide the same provision in books of accounts against such legal suit. Disclosure in respect of such event in respect of its nature and its impact thereof in books need to be provided.
2	Only Disclosure is suffice as per the Accounting Standard requirement.	Here, Both conditions of reasonably possible and best estimation need to be satisfied in order to adhere the rule of provision as per IAS -37, Hence in this case, Disclousure about the same of such legal suit is required in financial statemnet in footnotes, and its impact thereof.
3	Contingent Asset is not recognised at all.	Here, The rule of recognizing contingent asset crystalise on 100% realible issue, if it is 100% sure then recognise such value in books. However, in the said case the damages are awarded to the extent of 1500000 is still probable,hence no disclosure in required in FInancial Staements nor the value need to be recognised today.