A supplier sued Pneumatic Systems Inc. for $200,000 for breach of contract. Pneumatic's legal counsel believes that they will almost certainly be found liable. Based on previous results, the lawyer estimates that there is a 60% probability that the supplier will be awarded the $200,000; a 30% probability that the judgment will be $150,000; and a 10% probability that $100,000 will be conferred. Assuming that Pneumatic reports its financial results in accordance with IFRS, indicate which of the following will be the appropriate accounting treatment:

Question

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CUnder IFRS, when a liability is probable and the amount can be reliably estimated, it should be recognized in the financial statements. Given the legal counsel's belief that Pneumatic Systems Inc. will almost certainly be found liable, recognizing a liability is appropriate. The amount recognized should be the best estimate of the expenditure required to settle the present obligation. In this case, since there's a 60% probability of being required to pay the full $200,000, which is the highest probability and represents the most likely outcome, recognizing a liability of $200,000 (Choice B) is the most appropriate treatment. Additionally, IFRS requires disclosure of the details of contingencies in the notes to the financial statements (Choice C) to provide more information about the nature and potential impact of the liability.

A Supplier Sued Pneumatic Systems Inc