During 2022, an entity is the defendant in a patent infringement lawsuit. The lawyers believe that there is a 30% chance that the court will dismiss the case and the entity will incur no outflow of economic benefits. However, if the court rules in favor of the claimant, the lawyers believe that there is a 20% chance that the entity will be required to pay the damages of P100,000 and 80% chance that the entity will be required to pay damages of P200,000.00. Other outcomes are unlikely. The court is expected to rule in late December 2023. There is no indication that the claimant will settle out of court. A 7% risk adjustment factor to the probability-weighted expected cash flows is considered appropriate to reflect the uncertainties in the cash flow estimate. An appropriate discount rate is 5% per year. The present value of 1 at 5% for one period is 0.95. What is the undiscounted provision before risk adjustment? What amount should be reported as provision for lawsuit on December 31, 2022?
During 2022, an entity is the defendant in a patent infringement lawsuit. The lawyers believe that there is a 30% chance that the court will dismiss the case and the entity will incur no outflow of economic benefits.
However, if the court rules in favor of the claimant, the lawyers believe that there is a 20% chance that the entity will be required to pay the damages of P100,000 and 80% chance that the entity will be required to pay damages of P200,000.00. Other outcomes are unlikely.
The court is expected to rule in late December 2023. There is no indication that the claimant will settle out of court.
A 7% risk adjustment factor to the probability-weighted expected cash flows is considered appropriate to reflect the uncertainties in the cash flow estimate. An appropriate discount rate is 5% per year. The present value of 1 at 5% for one period is 0.95.
What is the undiscounted provision before risk adjustment?
What amount should be reported as provision for lawsuit on December 31, 2022?
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