Carpenter, Inc., a wholly owned subsidiary of the U.S.-based company, Buildings Ltd., was notified of a loss contingency with an estimated cost ranging between $100,000 and $220,000. Carpenter, Inc. hired an expert appraiser who assessed that all possible dollar amounts of liability in this range are equally likely. Management of Carpenter, Inc. has estimated that there is a 65 percent chance that this contingency will result in an actual loss.In the conversion from U.S. GAAP financial statements to IFRS financial statements, what is the amount of adjustment needed to adjust for the difference in accounting for a provision for loss contingency?

Question

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Under IFRS, a provision is recognized when there is a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. In this case, there is a present obligation as a result of the loss contingency, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Therefore, a provision should be recognized under IFRS. The amount of the provision is the expected value of the possible losses, which is $160,000 (0.65 x $220,000). The adjustment needed to adjust for the difference in accounting for a provision for loss contingency is $160,000.