Question

Problem 2

Problem 2 During 20x6, a catering company served spoiled food to a wedding reception. As a result of this, several people became violently ill. These have contacted a lawyer and are collectively suing the catering company for $1,600,000 (total). You are the catering company's accountant and are in the process of preparing the financial statements for the year ended December 31, 20x6. Legal counsel has provided you with the following Payout $0 Probability 30% 25% 25% 20% 200,000 609,000 1,600,000 Required - Estimate the provision that needs to be accrued, if any. Use the following table to analyze the situation. Assume that the catering company is IFRS compliant. Present obligation as a result of a past event Probable outflow Measurable? Conclusion

Answer 1

Present obligation as a result of past event............................ is present

Probable outflow....................................................................As chances not giving anything is only 30% hence it is probable

Measurable .............................................In case of multiple population events provision should be calculated using probability weighted

Probability	Payout
30%	0
25%	200000	50000
25%	600000	150000
20%	1600000	320000
Provision		520000

Conclusion Hence provision should be created for 520000