A customer of Razor Sharpeners alleges that Razor's new razor sharpener had a defect that resulted in serious injury to the customer. Razor believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under IFRS, Razor should accrue a liability in the amount of:
A) $0.
B) $1,000,000.
C) $2,000,000.
D) $3,000,000.

Question

Quizplus · Accepted Answer

Under IFRS, Razor should accrue a liability for the estimated cost of the loss, which is the product of the probability of the loss occurring and the expected amount of the loss. In this case, the estimated cost of the loss is:

51% x (($3,000,000 - $1,000,000) / 2) = 51% x $1,000,000 = $510,000

Therefore, Razor should accrue a liability of $510,000 in its financial statements. Since this amount falls between the options listed, the best choice is C ($2,000,000).

A Customer of Razor Sharpeners Alleges That Razor's New Razor