Answer:
b) a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000.
Explanation:
There are 2 conditions that must be met in making provisions, as stated by the International Accounting Standards (IAS 37). They are:
1. Present Obligation
2. Are outflows probable (i.e. more likely than not)
3. Can the outflows be reliably measured.
1. Present Obligation
In the given scenario, it was mentioned that there is a present obligation because ''Coronado Industries is being sued for illness caused to local residents as a result of negligence on the company's part'' hence this already informs that there is an obligation.
2. Are outflows probable (i.e. more likely than not)
From the scenario, it can be gathered that outflows are probable because the lawyer has stated ''it is probable that Coronado will lose the suit and be found liable'' that implies that there is a liability to be recognised
3. Can the outflows be reliably measured.
It is stated in the scenario that ''However, the lawyer states that the most probable cost is $5,430,000'' Hence, this represents a reliable estimate.
Furthermore, the other likely fraction in the worse case scenario should be shown in the disclosures or additional information.
