On March 22, year 1, Cole Corporation received notification
of legal action against the firm. Cole’s attorneys determine
that it is probable the company will lose the suit, and the loss is
estimated at $2,000,000. Cole’s accountants believe this amount
is material and should be disclosed. Cole prepares its financial
statements in accordance with IFRS. How should the estimated
loss be disclosed in Cole’s financial statements at December 31,
year 1?

(c) The requirement is to identify how the estimated
loss should be disclosed in the financial statements. Answer (c)
is correct because IFRS defines a provision as a liability that is
uncertain in timing or amount. Provisions are made for estimated
liabilities and recorded as a loss in earnings for the period
if the outcome is probable and measurable. Answer (a) is incorrect
because the loss should be recorded in the current period
income statement. Answer (b) is incorrect because under IFRS,
a contingency depends on some future uncertainty or event, it is
not probable that an outflow will be required to settle, or the
amount cannot be measured with reliability. If an item qualifies
as a contingency, it is disclosed in the notes to the financial
statements. Answer (d) is incorrect because contingencies are
disclosed in the footnotes.