Question

As at 30 June 20X1 (reporting date), Scott Ltd (Scott) is involved in a legal dispute with a supplier in relation to the early termination of the exclusive licence agreement between the two entities. The supplier is seeking damages of $10 million. The directors of Scott believe they will be successful in defending the claim. Scott's lawyers have advised that there is a 80% probability that the entity (Scott) would not be found liable.

In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the following is the most appropriate option for Scott when preparing its financial report for 30 June 20X1?
A. Do nothing
B. Disclose information about the possible liability as a contingent liability
C. Recognise a provision for the best estimate of the obligation to the supplier
D. Recognise a contingent liability for the best estimate of the obligation to the supplier

Answer 1

According to IAS 37, Scott should disclose the possible liability as a contingent liability in its financial report.

Step-by-step explanation:

According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the most appropriate option for Scott when preparing its financial report for 30 June 20X1 is to disclose information about the possible liability as a contingent liability.

This is because there is a legal dispute with a supplier and the outcome is uncertain.

The disclosure should provide sufficient information about the nature of the dispute, the potential amount involved, and the probability of an unfavorable outcome.