Question

A customer filed a lawsuit against Delta Ltd in December 2018. The lawsuit was for costs and damages allegedly incurred as a result of the failure of one of Delta Ltd's electrical products. The amount claimed was $3 million. Delta Ltd's lawyers have advised that the amount claimed by the customer is extortionate and that Delta has a good chance of winning the case. However, the lawyers have also advised that if Delta Ltd loses the case it is expected that costs and damages awarded would be $500,000. 1. Required A) Explain the accounting for contingent liabilities with reference to AASB 137. B) Under AASB 137, how should Delta Ltd disclose accounting implications of this lawsuit in its financial statements as at 31 December 2018?

Answer 1

1. The contingent liabilities is an off balance sheet item, shall be accounted only when the lability gets crystalized as per AASB137, the probability of occurrence of the event is determined based on which the liability is recorded or shown as contingent in notes to Financials

2. As mentioned in the question the lawyers think that there is high chance of Delta Ltd winning the case hence we shall not record the liability, at the same time revenue is not recorded before its realized hence the company shall show it as contingent in the financials, since the lawsuit pertains to FY 2017-18 hence it shall be recorded in the year ended December 2018 financials.