Provision on pending legal case

Question

We have a legal case filed by a contractor and our lawyer is in the opinion that it is very likely that we have to pay damages demanded by the contractor ($100,000). However the court decision is still pending as at the balance sheet date and it is likely that the court proceedings will take more than a year to finish. Are we required to recognize a provision on this on our current balance sheet date?

Answer 1

The IAS sets the recognition criteria for provision to be included in the financial statements. Para 37.11 states three condition to recognize the provision in the financial statements that are as follows:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If any of these conditions are not met, no provision shall be recognized.

Therefore regardless of the date of settlement of the suit a provision of $100,000 shall be recognized.