Another illustration An entity is a defendant in a patent infringement suit. The lawyers believe that there is a 60% chance that the court will not dismiss the case and the entity will incur an outflow of future economic benefits. If the court rules against the entity and in favor of the claimant, the lawyers believe that there is a 30% chance the entity will be required to pay damages of P4,000,000 and a 70% chance that the damages will be P2,000,000. A 10% risk adjustment factor to the probabilities of the expected cash flows is considered appropriate to reflect the uncertainties in the cash flow estimate. Measurement of provision Weighted probabilities: 30% x 4,000,000 x 60% 70% x 2,000,000 x 60% 720,000 840,000 Expected cash outflow Risk adjustment factor (10% x 1,560,000) 1,560,000 156,000 Estimated amount of provision 1,716,000 The amount of the provision shall be discounted if the effect of the time value of money is material.

Another illustration An entity is a defendant in a patent infringement suit. The lawyers believe that there is a 60% chance that the court will not dismiss the case and the entity will incur an outflow of future economic benefits. If the court rules against the entity and in favor of the claimant, the lawyers believe that there is a 30% chance the entity will be required to pay damages of P4,000,000 and a 70% chance that the damages will be P2,000,000. A 10% risk adjustment factor to the probabilities of the expected cash flows is considered appropriate to reflect the uncertainties in the cash flow estimate. Measurement of provision Weighted probabilities: 30% x 4,000,000 x 60% 70% x 2,000,000 x 60% 720,000 840,000 Expected cash outflow Risk adjustment factor (10% x 1,560,000) 1,560,000 156,000 Estimated amount of provision 1,716,000 The amount of the provision shall be discounted if the effect of the time value of money is material.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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