ACCA Strategic Business Reporting (SBR) Practice Exam

What characterizes a contingent liability according to IAS 37?

1. It can be recognized as an obligation

2. It must always be reported in the financial statements

3. It arises from past events but cannot be reliably measured

4. It is a present obligation requiring immediate payment

The correct answer is: It arises from past events but cannot be reliably measured

A contingent liability is characterized by its dependence on the occurrence of uncertain future events. According to IAS 37, it arises from past events, specifically when there is a present obligation that can be confirmed only upon the occurrence or non-occurrence of one or more future events that are not entirely within the control of the entity. This means that while the liability is linked to an event that has already occurred (for example, a lawsuit that may or may not result in a pay-out), it cannot be reliably measured until that uncertainty is resolved. Thus, option C accurately reflects the definition of a contingent liability. In contrast, the other options misinterpret the nature of contingent liabilities. Recognizing them as obligations (the first option) is not correct since contingent liabilities are recognized only when they meet specific criteria, particularly when the possibility of an outflow of resources is probable and can be measured reliably. The requirement to always report them in financial statements (the second option) also misunderstands the conditions for disclosure; contingent liabilities are only disclosed when they are significant, not just when they exist. Lastly, classifying a contingent liability as a present obligation requiring immediate payment (the fourth option) ignores the very essence of contingency; a contingent liability does not involve a current