Gowanland Co Plc is being sued over damage to farmland as a result of an accident in which poisonous chemicals were mixed with fertiliser.At reporting date there was no information about the court decision and a contingent liability had been disclosed.Subsequent to the reporting date,the court handed down its decision and upheld a substantial claim for damages.According to IAS 10 how should this event be treated in the financial statements?
A)The contingent liability note should be extended to provide additional information based on the after-reporting-date event.
B)The contingent liability note should remain as it is because it reflects the situation existing at reporting date.
C)The contingent liability can now be measured reliably and is no longer contingent, so it should be recognised in the financial statements as a provision.
D)The treatment would depend on whether or not the entity had received advice from solicitors regarding the likely success of an appeal.

Question

Quizplus · Accepted Answer

According to IAS 10, a provision should be recognized if it is probable and the amount can be reliably measured. As the court has now handed down its decision and upheld a substantial claim for damages, the contingent liability can be measured reliably and is no longer contingent. Therefore, it should be recognized as a provision in the financial statements. Option A is incorrect as extending the contingent liability note would not reflect the change in status from a contingent liability to a provision. Option B is incorrect for the same reason. Option D is incorrect as the entity should recognize the provision as soon as it meets the criteria and cannot wait until the outcome of potential future events.

Gowanland Co Plc Is Being Sued Over Damage to Farmland