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Zeta, Ltd., a company that prepares its financial statements in accordance with IFRS, has the following pending items at December 31, 2014.
The company is the defendant in a product liability lawsuit as a result of injuries incurred by purchasers of its products. Legal counsel has indicated that an unfavorable verdict in the amount of $650,000 is probable.
The company is involved in another lawsuit and their legal counsel believes it is reasonably possible that the lawsuit will result in a loss of $175,000.
The entity sells a product that is subject to a warranty. The estimated warranty liability is $150,000.
In its financial statements for the period ended December 31, 2014, how much will be reported either on the balance sheet or in the footnotes for contingencies and how much for provisions?
a. A contingency of $650,000 will be accrued, a contingency of $175,000 will be disclosed, and a provision of $150,000 will be accrued as a liability.
b. A contingency of $175,000 will be disclosed and provisions of $800,000 will be accrued as liabilities.
c. Contingencies of $825,000 will be accrued and a provision of $150,000 will be accrued as a liability.
d. Contingencies of $800,000 will be accrued and a provision of $175,000 will be disclosed.
Expert Answer
Under IFRS contingencies are those that are not probable, cannot be estimate, or neither probable nor estimable are disclosed in the notes to the financial statements. Provisions are those that are both probable and estimable and are recognized on the balance sheet. The 650000 lawsuit damages and the 150000 warranty obligation are both probable and estimable so should be treated as provisions. Damages from the lawsuit of 175000 are not probable so it will be contingent.
Answer is option b.
A contingency of $175,000 will be disclosed and provisions of $800,000 will be accrued as liabilities.
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