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IFRS 37 Contingent liability and defining examples

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Explain how IFRS defines a contingent liability and provide an example.

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IFRS 37 defines a contingent liability as (exact quote):

"... liabilities of uncertain timing or amount. A provision should be recognised when, and only when:
(a) an entity has a present obligation (legal or constructive) as a result of a
past event;
(b) it is probable (ie more likely than not) that an outflow of resources
embodying economic benefits will be required to settle the obligation;
(c) a reliable estimate can be made of the amount of the obligation.
The Standard notes that it is only in extremely rare cases that a reliable
estimate will not be possible. (IFRS 37, para IN2)

"In rare cases, for example in ...

Solution Summary

Your discussion is 445 words and includes the exact wording from IFRS 37. Two examples are given, one that is accrued and one that is disclosed only.

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ABC Ltd, Events after the Reporting Period *per HKAS 10*

ABC Ltd, an engineering company, makes up its financial statements to 31 March in each year. The financial statements for the year ended 31 March 2010 showed revenue of $30 million and profit of $4 million. Before the authorization of financial statements for issue by the board of directors on 30 June 2009, the following events took place:

1. The financial statements of DEF Ltd for the year ended 28 February 2010 were received, which indicated a significant deterioration in the companyâ??s financial position. ABC Ltd bought shares in DEF Ltd some years ago and this purchase was included in unlisted investments at its cost of $1 million. The financial statements received indicated that this investment was now worth only $500,000.

2. There was a fire at the companyâ??s warehouse on 30April 2010 when all of the companyâ??s inventories to the value of $5 million were destroyed. The investors in the warehouse were under-insured by 50%.

3. On 31 March 2010 a provision was made of $600,000 in respect of any remedial work required on plant supplied and installed at a customerâ??s premises on 26 March 2010. No remedial work had been carried out. On 1 May 2010 the customer confirmed acceptance of the plant, accordingly no further liability would be involved.

4. It was announced on 1 June 2010 that companyâ??s design for tank cleaning equipment had been approved by the major oil companies and this could result in an increase in the annual revenue of some $10 million with a relative effect on profit.


State, giving your reasons, how these events should be dealt with in the companyâ??s financial statement for the year ended 31 March 2010 in order to comply with the requirements of HKAS 10 â?" Events after the Reporting Period

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