Question

Question: In determining the amount of a provision, a company using IFRS should generally measure:

(a) Using the midpoint of the range between the lowest possible loss and the highest possible loss.

(b) Using the minimum amount of the loss in the range.

(c) Using the best estimate of the amount of the loss expected to occur.

(d) Using the maximum amount of the loss in the range.

Short answer

The correct option is option C.

Step-by-step solution

Definition of Provision

It is an uncertain liability that is recorded as a short-term or long-term liability depending on the future payment date. Business firms also face uncertainty regarding the amount of their payment and the date of its payment. This can be related to warranties, contingencies, lawsuits, etc.

Explanation for the correct option

For measuring provision, IFRS provides to account for the best-estimated expense for settling down the uncertain liability. This way of measuring provision helps the companies to know all possible future losses. IFRS also mandates companies to disclose provisions in the notes to the financial statements. Hence, Option C is correct.

Explanation for the incorrect options

Option A: Using the midpoint of highest and lowest loss will not provide correct future loss or gain. It provides an average of the highest and lowest gain.

Option B:If the company face higher loss in the future, then the minimum amount of provision will not help it to encounter future uncertainties.

Option D: If the company accounts for higher loss as a provision, then it may undue reduce the profits of the firm.