- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 2. Analyzing Income Statements
- Subject 2. Expense Recognition - Inventory
CFA Practice Question
A company is sued by a customer for damage. Experience indicates that the claim probably won't be successful. Should a provision be recognized in the balance sheet?
Correct Answer: No
There is an actual duty, but the outflow of economic benefit is not probable. As the damage cannot be measured exactly and with reliability, there is no provision for it to be recognized on the balance sheet. (You are not allowed to show that provision!) In the notes there is only a contingent liability to be reported on.
User Contributed Comments 4
| User | Comment |
|---|---|
| pk84 | 2 rules for recognition under IASB: 1) Should be probable: In the above case, yes its probable. 2) Should be measurable: In the above case, its not measurable. so, the provision won't be recognised. |
| Sam123456 | You mean it is not probable. |
| moneyguy | I agree with Sam |
| ezimokha | @pk84 you should delete your comment and not confuse others. |