Question

In May of 2021, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2021, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $761,000 but could be as high as $1,152,000. After the year-end, but before the 2021 financial statements were issued, Raymond accepted an EPA settlement offer of $882,000.
Required:
a. Raymond should have reported an accrued liability on its December 31, 2021, balance sheet of ____________.

Answer 1

Answer:

$882,000

Explanation:

According to IAS 37, Provisions, contingent liability and contingent assets,  A provision is a liability of uncertain timing or amount. The liability may be a legal obligation or a constructive obligation.

An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. Furthermore, the standard requires that a provision is measured at the amount that the entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time.

The amount to be accrued for is the settlement offer of $882,000 which was accepted before the financial statement was issued. This settles the uncertainty in the amount to be provided for.