Sbr (int/UK) Strategic Business Reporting

(1 mark) 

Provision 

IAS 37 Provisions, Contingent liabilities and Contingent Assets requires that a 

provision be recognised if the following conditions are met: 

(i)  

there is a present obligation (legal or constructive) as a result of a past event 

(ii)   a probable outflow of economic resources will be required to settle the 

obligation and 

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MO CK A  ANSWER S 

K APLAN P UBLISH IN G  

 

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(iii)   the amount of the obligation can be estimated reliably. 

(1 mark) 

The amount recognised as provision should be the best estimate of the expenditure 

which an entity would rationally pay to settle the obligation at the reporting date. 

  

(1 mark) 

Medsupply has offered $7 million to settle both claims without going to court and 

therefore this implies that Medsupply believes that it is more likely than not that 

there will be an outflow of economic resources as a result of a legal obligation. A 

provision should therefore be recognised.  

(1 mark) 

The amount of the provision should be for the best estimate of the amount required 

to settle the obligation. For a single obligation, the best estimate is likely to be the 

most likely outcome. 

(1 mark) 

Medsupply should recognise a provision of $10 million in its financial statements at 

31 May 20X8 (midway between $7 million and $13 million). 

(1 mark) 

It should disclose the uncertainties relating to the amount or timing of these cash 

outflows in a note to the financial statements.