Contingent liabilities that are probable (greater than 50%) should be treated by making a provision.

Contingent liabilities that are probable (greater than 50%) should be treated by making a provision.

• A. Disclose in notes.
• B. Recognise as revenue.
• C. Make a provision.
• D. Ignore.

Answer: (C)

When a contingent liability is probable (more likely than not), there is a present obligation arising from a past event and an outflow of resources is likely. That combination requires recognizing a provision in the balance sheet for the best estimate of the expenditure needed to settle the obligation (and adjust as needed over time). This recording also matches the expense to the period in which the obligation becomes probable. Disclosing in notes alone would not satisfy the requirement when the outflow is probable, and it is not revenue or something to be ignored.

When a contingent liability is probable (more likely than not), there is a present obligation arising from a past event and an outflow of resources is likely. That combination requires recognizing a provision in the balance sheet for the best estimate of the expenditure needed to settle the obligation (and adjust as needed over time). This recording also matches the expense to the period in which the obligation becomes probable. Disclosing in notes alone would not satisfy the requirement when the outflow is probable, and it is not revenue or something to be ignored.