Accounting · Accounting Concepts and Provisions
Applying the prudence concept, an entity evaluates a pending lawsuit. If the future outflow of resources is considered possible but not probable, what is the appropriate treatment in the financial statements?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Refrain from recognizing a liability, but disclose it as a contingent liability in the notes.✓
- 2Recognize a liability and an expense in the Statement of Profit and Loss immediately.
- 3Recognize a liability in the balance sheet but defer the expense recognition.
- 4Neither recognize a liability nor an expense, and make no disclosure in the notes.
Correct answer
Refrain from recognizing a liability, but disclose it as a contingent liability in the notes.
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