Q: What mistakes do candidates make on this ACCA question?

Students often think they should provide for 30% of the value, confusing single obligation rules with expected value methods for large populations.

Question 1

SECTION A - CASE 2: GREENHARVEST CO-OP

SCENARIO:
You are the audit senior for GreenHarvest Co-op, a large agricultural cooperative, for the year ended 31 March 20X5. The audit is nearing completion. During the review phase, you note the following:
1) A major customer, representing 15% of receivables, went into liquidation on 15 April 20X5.
2) GreenHarvest is facing a lawsuit from a supplier regarding contaminated fertilizer, which the legal counsel advises has a 30% chance of success.
3) The directors have refused to disclose a key executive's remuneration, which is required by local legislation, though the amount is immaterial to the financial statements as a whole.

QUESTION:
Based on the legal counsel's advice that the lawsuit has a 30% chance of success, what is the correct accounting treatment under IAS 37 Provisions, Contingent Liabilities and Contingent Assets?

Accepted Answer

Apply the IAS 37 definitions: Probable (>50%) = Provision. Possible (<50% but not remote) = Contingent Liability disclosure. Remote = Do nothing.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Students often think they should provide for 30% of the value, confusing single obligation rules with expected value methods for large populations.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA AA — Audit and Assurance Practice Exam 1

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