Accounting Treatment under IAS 37

IAS 37 requires a provision to be recognized if:

1. A present obligation exists due to a past event.
2. It is probable (more than 50%) that an outflow of resources will be required to settle the obligation.
3. A reliable estimate of the obligation can be made.

(i) Identifying Whether a Provision is Required

• The legal claim relates to events before the reporting date (30 April 2024), indicating a past obligating event.
• The total probability of losing the case is 72% (45% + 27%), which is more than 50%, meaning it is probable that a liability exists.
• The potential financial outflows can be reasonably estimated.

➡ Conclusion: A provision should be recognized in Agropah’s financial statements.

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(ii) Measurement of the Provision

IAS 37 requires the provision to be recorded at the best estimate of the obligation, which is the most likely amount expected to be paid.

• There is a 45% chance that GH¢3.2 million will be paid.
• There is a 27% chance that GH¢5 million will be paid.

Using the expected value approach:

$$(45\%\times 3.2M)+(27\%\times 5M)$$ $$=1.44M+1.35M$$ $$=GH¢2.79M$$

➡ Provision to be recognized = GH¢2.79 million.

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(iii) Journal Entry for the Provision

Date	Account	Debit (GH¢’000)	Credit (GH¢’000)
30 June 2024	Legal Expense (P&L)	2,790	–
30 June 2024	Provision for Legal Claim (Liability)	–	2,790

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(iv) Disclosure in Financial Statements

IAS 37 also requires disclosure of contingent liabilities if the likelihood of an obligation occurring is possible but not probable.

• Since there is a 28% chance that the case may not succeed, the remaining GH¢2.21 million (GH¢5M – GH¢2.79M) will be disclosed as a contingent liability in the notes to the financial statements.

➡ Note Disclosure Example:

Agropah PLC has received a legal claim for GH¢5 million related to faulty goods supplied. A provision of GH¢2.79 million has been recognized in the financial statements based on the expected payout. Additionally, a contingent liability of GH¢2.21 million has been disclosed in the notes, representing the possible maximum exposure if the claim is fully awarded.

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(v) Impact on Financial Statements

Statement of Financial Position (Extract) as at 30 June 2024

Liabilities	GH¢’000
Provision for Legal Claim	2,790

Statement of Profit or Loss (Extract) for the year ended 30 June 2024

Expense	GH¢’000
Legal Claim Expense	2,790

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Conclusion

• A provision of GH¢2.79 million should be recognized in the financial statements.
• A contingent liability of GH¢2.21 million should be disclosed.
• The provision ensures compliance with IAS 37 and accurately reflects the financial risk of the lawsuit.