Question

In accordance with the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, where measurement uncertainty exists, which of the following methods is not an appropriate valuation for a provision based on accounting standards?

A. The mid-point of a range of equally likely outcomes of expenditure
B. No provision should be recognised where measurement uncertainty exists
C. The minimum amount expected to represent a best estimate, where the other option is omission
D. The most likely amount expected to represent a best estimate, where there is a single obligation

Answer 1

In accordance with IAS 37, the inappropriate valuation method for a provision when measurement uncertainty exists is refusing to recognize any provision. Valuation should still occur, using methods like the mid-point, minimum amount, or most likely amount. Hence, option (B) is correct.

Step-by-step explanation:

According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, when measurement uncertainty exists, it specifies different approaches to valuing provisions. The incorrect method is: No provision should be recognized where measurement uncertainty exists. Instead, other approaches such as the mid-point of a range of equally likely outcomes, the minimum amount in the range, or the most likely amount should be used to estimate the provision.

When dealing with measurement uncertainty, the measurement outcome could be calculated using different values, and an appropriate choice is made to represent the best estimate. For example, that can be the mid-point or the most likely amount. IAS 37 ensures that provisions are accounted for in a systematic manner that best reflects the economic realities of the uncertainty involved.