Gowanland Co Ltd 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 AASB 110 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 AASB 110, a provision should be recognised when a present obligation arises from past events and settlement is expected to result in an outflow of resources embodying economic benefits that can be reliable measured. As the court has already handed down its decision and upheld a substantial claim for damages, the contingent liability can no longer be considered as a contingent and should be recognised in the financial statements as a provision.

Gowanland Co Ltd Is Being Sued Over Damage to Farmland