ShoSho Manufacturing.is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant.ShoSho's lawyer states that it is probable that ShoSho will lose the suit and be found liable for a judgment costing ShoSho anywhere from $1,200,000 to $4,400,000.However,the lawyer states that the most probable cost is $3,300,000.As a result of the above facts,what accounting recognition,if any,should be accorded this situation under IFRS?

Question

Quizplus · Accepted Answer

According to IFRS, a company should accrue a loss contingency if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In this case, Shosho's lawyer has stated that it is probable that Shosho will lose the suit and be found liable for a judgment costing anywhere from $1,200,000 to $4,400,000, with the most probable cost being $3,300,000. Therefore, Shosho should accrue a loss contingency of $3,300,000. Additionally, the company should disclose an additional contingency of up to $1,100,000, which is the difference between the upper range of the potential liability and the most probable amount of the loss contingency.