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Chapter 15

Example 1

IAS37

Shakespeare is involved in a number of lawsuits at its year-end of 31 March
20X9. Details of three of these cases are as follows:

Shakespeare is being sued by Marlowe over copyright issues. Shakespeare
has been advised that it has only 20% chance of successfully defending the
case, and that the potential payout is $600,000.

Shakespeare is suing Hathaway for $200,000 for a breach of contract and
has been advised that it has 80% chance of success.

Shakespeare is being sued for $350,000 by Claudio for selling short
measures and has been advised that Claudio has only 40% chance of
success.

How will the above cases be reflected within the financial statements?

Solution

Marlowe has 80% chance of success, and this therefore represents a
probable outflow of benefit and thus should be provided at 31 March 20X9.
The value provided should represent the most likely outcome, $600,000, and
will appear as a provision within liabilities on the statement of financial
position and as an expense in the statement of profit or loss.

The Hathaway case represents a contingent asset, as Shakespeare has a
probable inflow of benefit. Details of this situation should therefore be
disclosed within the notes to the financial statements.

Shakespeare will probably win the Claudio case, but there is a possible
outflow of benefit. This represents a contingent liability and, like the
Hathaway case, details of this situation should also be disclosed within the
notes to the financial statements.

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