According to IAS 37, a provision should be recognized when a company has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
In this case, the probabilities of the possible outcomes are provided, and the amounts that are likely to be granted are R5 million, R15 million, R3 million, and R2 million. To calculate the provision, we multiply the probabilities by the respective amounts and add them up:
(0.15 x 0) + (0.20 x R5 million) + (0.25 x R15 million) + (0.20 x R3 million) + (0.20 x R2 million) = R5,750,000
Therefore, the provision that should be recognized in this case is R5,750,000. Hence, the correct answer is:
R5,750,000
The Tale Newspapers publishes an article in which it is alleged that a prominent politician is having an improper extramarital affair with one of his secretaries. The owner of the company, the Tale Newspapers, is summonsed for alleged defamation amounting to R25 million. The company’s legal advisers assessed the possible outcomes of the case as follows:
Probabilities:
– 15% that the claim will fail;
– 20% that an amount of R5 million will be granted;
– 25% that an amount of R15 million will be granted;
– 20% that an amount of R3 million will be granted;
– 20% that an amount of R2 million will be granted
Required:
According to IAS37 Provisions, Contingent liabilities and Contingent assets), how much will be recognised as a Provision?
R15 000 000
R5 750 000
R25 000 000
R3 750 000
1 answer
1 answer