Accounting · IAS 37 Provisions
Malcom Co is facing a class-action lawsuit from customers regarding a faulty product sold in the previous financial year. Malcom Co's legal team advises that it is more likely than not that the company will have to pay compensation, estimated to be between $5 million and $10 million, with all outcomes in that range being equally probable. Under IAS 37, how should this be recognized and disclosed for the year ended 31 December 20X4?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1A provision of $7.5 million should be recognized in the statement of financial position, and a note disclosing the nature of the obligation and the uncertainties regarding the amount should be provided.✓
- 2No provision should be recognized; instead, a contingent liability of between $5 million and $10 million should be disclosed in the notes.
- 3A provision of $7.5 million should be recognized in the statement of financial position, and no further disclosure is required.
- 4A provision of $5 million should be recognized in the statement of financial position, with a note disclosing the range of possible outcomes.
Correct answer
A provision of $7.5 million should be recognized in the statement of financial position, and a note disclosing the nature of the obligation and the uncertainties regarding the amount should be provided.
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