CHAPTER 4

PROVISION
 PROVISION CONTINGENT

A liability of uncertain timing or Refers to those liabilities and

amount that meets all the assets that are not recognized
following conditions: because they do not meet all of
the recognition criteria.
present obligation
probable outflow
reliably estimated
 LIABILITY ASSET

VIRTUALLY CERTAIN Accrue & Disclose Accrue & Disclose

(90% and up)

PROBABLE Accrue & Disclose Disclose

Provision Contingent asset
(51% and up)

Disclose
POSSIBLE Contingent liability Ignore

REMOTE Ignore Ignore

4-1
THE ENTITY IS DEFENDING AGAINST A FIRST LAWSUIT AND BELIEVED
THERE IS A 51% CHANCE IT WILL LOSE IN COURT. THE ENTITY
ESTIMATED THE DAMAGES FROM THE LAWSUIT AT P1,000,000.

THE ENTITY WOULD RECOGNIZE AND ACCRUE A LIABILITY OF

P1,000,000 BECAUSE 51% IS CONSIDERED PROBABLE.
4-1
THE ENTITY IS DEFENDING AGAINST A FIRST LAWSUIT AND BELIEVED
THERE IS A 51% CHANCE IT WILL LOSE IN COURT. THE ENTITY
ESTIMATED THE DAMAGES FROM THE LAWSUIT AT P1,000,000.

THE ENTITY WOULD RECOGNIZE AND ACCRUE A LIABILITY OF

P1,000,000 BECAUSE 51% IS CONSIDERED PROBABLE.
THE ENTITY IS DEFENDING AGAINST A SECOND LAWSUIT FOR WHICH
MANAGEMENT BELIEVED IT IS VIRTUALLY CERTAIN TO LOSE IN COURT.

IF IT LOSES THE LAWSUIT, MANAGEMENT ESTIMATED DAMAGES WILL

FALL SOMEWHERE IN THE RANGE OF P3,000,000 TO P5,000,000 WITH
EACH AMOUNT IN THAT RANGE EQUALLY LIKELY TO OCCUR.

SINCE IT IS VIRTUALLY CERTAIN, THE ENTITY WOULD RECOGNIZE

AND ACCRUE A LIABILITY OF P4,000,000 - THE MIDPOINT OF THE
RANGE.

3,000,000 + 5,000,000 = 8,000,000

8,000,000 / 2 = 4,000,000
THE ENTITY IS DEFENDING AGAINST A THIRD LAWSUIT BUT THE
RELEVANT LOSS WILL ONLY OCCUR FAR INTO THE FUTURE. THE
PRESENT VALUES OF THE ENDPOINTS OF THE RANGE ARE P1,500,000
AND P2,500,000.

THE MANAGEMENT BELIEVED THE EFFECTS OF THE TIME VALUE OF

MONEY ON THESE AMOUNTS ARE MATERIAL BUT ALSO BELIEVED THE
TIMING OF THESE AMOUNTS IS UNCERTAIN.

THE ENTITY WOULD RECOGNIZE AND ACCRUE A LIABILITY OF

P2,000,000 - THE MIDPOINT OF THE RANGE.

1,500,000 + 2,500,000 = 4,000,000

4,000,000 / 2 = 2,000,000
THE ENTITY IS DEFENDING AGAINST A FOURTH LAWSUIT AND
BELIEVED THERE IS ONLY A 25% CHANCE IT WILL LOSE IN COURT.

IF THE ENTITY LOSES, MANAGEMENT BELIEVED DAMAGES WILL FALL

SOMEWHERE IN THE RANGE OF P3,000,000 TO P4,000,000 WITH EACH
AMOUNT IN THE RANGE EQUALLY LIKELY TO OCCUR.

BECAUSE A 25% POSSIBILITY IS SEEN AS REMOTE, THE ENTITY

WOULD NOT MAKE ANY RECOGNITION.
4-3
IN MAY 2022, EASTERN COMPANY BECAME INVOLVED IN LITIGATION. IN
DECEMBER 2022, THE COURT ASSESSED A JUDGMENT FOR P1,600,000
AGAINST EASTERN COMPANY. THE ENTITY IS APPEALING THE AMOUNT OF
THE JUDGMENT.

THE ATTORNEYS BELIEVED IT IS PROBABLE THAT THE ASSESSMENT CAN BE

REDUCED ON APPEAL BY 50%. THE APPEAL IS EXPECTED TO TAKE AT
LEAST A YEAR.

Loss on lawsuit 800,000

Estimated liability for lawsuit 800,000

IN JULY 2022, PASIG CITY BROUGHT ACTION AGAINST EASTERN COMPANY
FOR POLLUTING THE PASIG RIVER WITH ITS WASTE PRODUCTS.

IT IS PROBABLE THAT THE PASIG CITY WILL BE SUCCESSFUL BUT THE

AMOUNT OF DAMAGES THE ENTITY MIGHT HAVE TO PAY SHOULD NOT
EXCEED P1,500,000.

Environmental cost 1,5 00 ,00 0

Estimated liability for 1,500,000

environmental cost
EASTERN COMPANY SIGNED AS GUARANTOR FOR A P1,000,000 LOAN BY
FIRST BANK TO NORTHERN COMPANY, A PRINCIPAL SUPPLIER TO EASTERN
COMPANY.

AT THIS TIME, THERE IS ONLY A REMOTE LIKELIHOOD THAT EASTERN

COMPANY WILL HAVE TO MAKE PAYMENT ON BEHALF OF NORTHERN
COMPANY.

SINCE THERE IS SIMPLY A REMOTE POSSIBILITY THAT A FUTURE

PAYMENT WILL BE MADE, THE ENTITY WOULD NOT MAKE ANY
RECOGNITION.
EASTERN COMPANY OWNED A MANUFACTURING SITE THAT HAD NOW
BEEN DISCOVERED TO BE CONTAMINATED WITH TOXIC WASTE.

THE ENTITY HAS ACKNOWLEDGED ITS RESPONSIBILITY FOR THE

CONTAMINATION.

AN INITIAL CLEAN UP FEASIBILITY STUDY HAS SHOWN THAT IT WILL COST

AT LEAST P500,000 TO CLEAN UP THE TOXIC WASTE.

Contamination clean up cost 500,000

Estimated liability for clean 500,000

up cost
EASTERN COMPANY HAD BEEN SUED FOR PATENT INFRINGEMENT AND
LOST THE CASE. A PRELIMINARY JUDGEMENT OF P300,000 WAS ISSUED
AND IS UNDER APPEAL.

THE ENTITY’S ATTORNEYS BELIEVED THAT IT IS PROBABLE THAT THE

ENTITY WILL LOSE THIS APPEAL.

Loss on lawsuit 300,000

Estimated liability for lawsuit 300,000