Lawton
& Border Inc. is involved in a lawsuit at December 31, 2011. Under existing
IFRS standards in IAS 37,
(a)
Prepare the December 31 entry assuming it is probable (and very likely) that
Lawton & Border will be liable for $700,000 as a result of this suit.
(b)
Prepare the December 31 entry, if any, assuming it is probable (although not
likely) that Lawton & Border will be liable for a payment as a result of
this suit.
(c)
Would your answer change if it was not probable that Lawton & Border would
be liable?
(d)
How would your answers to parts (a) and (b) change assuming that Lawton
&
Border follows the proposed amendments to IAS 37?
(e)
Repeat parts (a) and (b) assuming that Lawton & Border follows private
enterprise GAAP.
|
(a)
|
Lawsuit Loss.......................
|
700,000
|
|
|
|
Lawsuit
Liability..............
|
|
700,000
|
|
(b)
|
Lawsuit Loss.......................
|
700,000
|
|
|
|
Lawsuit
Liability..............
|
|
700,000
|
(c) No
entry is necessary. The loss is not accrued because it is not probable that a
liability has been incurred at 12/31/11.
(d) Under
the Exposure Draft of Proposed Amendments to IAS 37 Provisions, Contingent
Liabilities and Contingent Assets, the term “contingent liabilities” is
eliminated. This is based on the fact that either a situation results in a
liability or it does not; a contingency relates to a future event, not whether
the obligation exists at the reporting date. Liabilities can arise only from
unconditional (or non-contingent) obligations. Uncertainty about the amounts
that might be payable in the future is taken into account in the measurement of
the liability, not its existence. If a liability is recognized, it is measured,
and it is the measurement that takes into account the uncertainties that exist.
(e) PE GAAP where lawsuit liability is likely:
|
Lawsuit Loss.......................
|
700,000
|
|
|
Lawsuit
Liability.............
|
|
700,000
|
PE
GAAP where lawsuit liability is not likely:
No
entry is necessary. The loss is not accrued because it is not likely that a
liability has been incurred at 12/31/11.
