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 $1,500,000 to $4,800,000. However, the lawyer states that the most probable cost is $4,100,000. As a result of the above facts, what accounting recognition, if any, should be accorded this situation under IFRS?
A) ShoSho should accrue a loss contingency of $4,100,000 and disclose an additional contingency of up to $700,000.
B) ShoSho should accrue a loss contingency of $1,500,000 and disclose an additional contingency of up to $3,300,000.
C) ShoSho should not accrue a loss contingency but disclose a contingency of up to $1,500,000.
D) ShoSho should not accrue a loss contingency or disclose any contingency.

Question

Quizplus · Accepted Answer

Under IFRS, if it is probable that a liability has been incurred and the amount can be reasonably estimated, a provision should be recognized. The most probable cost of $4,100,000 should be accrued, and the potential additional amount of $700,000 should be disclosed.