AAT Level 4 Drafting and Interpreting Financial Statements Practice Test 2026 - Free Financial Statements Practice Questions and Study Guide

When a liability is contingent, you only recognize a provision if the outflow is probable. A 20–50% chance is not probable, so it doesn’t become a provision. Instead, disclose the contingent liability in the notes to the financial statements. The disclosure should describe the nature of the obligation and, if possible, provide an estimate of its financial effect and the uncertainties involved. This approach informs users without overstating liabilities. If the likelihood were actually probable, you would recognize a provision; if the chance were remote, disclosure might not be needed. Recognizing it as revenue or ignoring it would not be appropriate treatments.