Under IAS 37, a possible obligation arising from a past event that depends on an uncertain future event is generally called a:
Correct answer: B. Contingent liability
- A. Prepaid expense
- B. Contingent liability
- C. Capital reserve
- D. Trade payable
Explanation
A contingent liability is a possible obligation whose existence or amount depends on uncertain future events. It is generally disclosed unless the chance of an outflow is remote. A provision is recognized when the obligation and probable outflow meet the required criteria.
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About Accruals, Prepayments and Provisions
Accruals and prepayments adjust income and expenses to the accounting period in which they are earned or incurred, following the matching principle. Provisions recognise expected obligations or losses when their amount or timing is uncertain, which distinguishes them from ordinary accruals and from general reserves.
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