CASE #006IAS 37
“We Probably Won’t Lose the Lawsuit.”
The lawyers say a payment is probable. The CEO read only the first page and wants to provide nothing.
01The situation
Year-end close · GreenHome Products
A distributor is suing GreenHome Products, claiming a batch of defective products caused it losses. At year end the external lawyers send their assessment: a payment is probable, around 65%, with a most likely settlement of €900,000.
MIKE — CEO
“If we still have a 35% chance of winning, let’s not provide for anything.”
SARAH — AUDITOR
“Does accounting require absolute certainty?”
| Obligating event | Defective products already sold |
|---|---|
| Probability of payment | About 65% (probable) |
| Most likely outcome | €900,000 |
| Reasonable range | €700,000 – €1,200,000 |
| Expected resolution | Within 9 months |
| Discounting | Not material |
02Your mission
Certainty is not the test.
- Determine whether there is a present obligation.
- Assess whether an outflow is probable.
- Decide between a provision and disclosure only.
- Determine the best estimate.
- Prepare the journal entry.
- Explain what would change at a 30% probability.
03Think first
What would you do?
Every case asks for your answer before it shows you the solution. Getting it wrong here is part of the method.
04The solution
This is how the solution starts. The rest is in the full case.
STEP 1 · PRESENT OBLIGATION
Past event: defective products sold
Yes
Probability, best estimate, entry, disclosure and the 30% scenario.
Unlock for $9.90What’s included
Everything you need to solve it.
- PDF caseThe story, the facts and the questions.
- Excel modelObligation, probability, estimate and treatment, with scenarios.
- Complete solutionStep-by-step reasoning, not just the final number.
- Journal entriesProvision, reimbursement and settlement.
- Common mistakesThe ones Leo would make. And probably you too.
- Final challengeA €500,000 insurance reimbursement: net it or show it separately?
WHAT YOU’LL PRACTISE
Preview
A look inside.
- p. 1Cover
- p. 3The Case
- p. 7The Solution
- p. 10Journal Entries
In this case
- Mike, CEOWants certainty before providing.
- Sarah, AuditorAsks if certainty is required.
- Leo, Junior AccountantNo exact amount, so nothing to book.
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