A negligence claim against the practice: provision or note?
When a law practice sued for negligence must show a provision in its books, when a note in its financial statements is enough, and how it is measured.
By Achekam · · 5 min read · For Legal businesses in South Africa, Nigeria, Kenya
The summons arrives a few weeks before year end. A former client says the practice missed a deadline in a claim it was handling, and that the client lost the claim as a result. They want damages. The partners believe the practice did nothing wrong, or that the client's case would have failed anyway. The insurers have been told. Now the practice's own accountant is asking what to put in the financial statements.
Lawyers are used to assessing claims against other people. Assessing one against their own practice, for accounting purposes, uses different language and a different standard: IAS 37. The answer is not always a figure in the balance sheet, but it is never nothing.
What a provision is
IAS 37 defines a provision as a liability of uncertain timing or amount. It may arise from a legal obligation, or from a constructive obligation, where the entity's own actions have created an expectation that it will accept a responsibility. The IFRS Foundation summarises the standard on its IAS 37 page, including how provisions differ from contingent liabilities.
A negligence claim fits the "uncertain" part exactly. If the practice is found liable, it will have to pay, but nobody knows whether that will happen, how much it will be, or when.
Probable, possible or remote
IAS 37 says an entity recognises a provision if it is probable that an outflow of cash or other resources will be needed to settle it. If an outflow is not probable, the item is a contingent liability: it is not recognised in the statement of financial position, but it is disclosed in the notes, unless the possibility of an outflow is remote.
IAS 37 itself gives litigation as an example of a contingent liability: a case where it is uncertain whether the entity has committed an act of wrongdoing and settlement is not probable.
That gives the practice three possible answers:
| Assessment of the claim | What the financial statements show |
|---|---|
| An outflow is probable | A provision in the statement of financial position, with an expense |
| An outflow is possible but not probable | No provision; a note describing the contingent liability |
| The possibility of an outflow is remote | Nothing recognised and no note needed |
The judgment between these rests on the evidence at the reporting date, not on hope. It helps to get a written view from the attorney or advocate handling the defence, independent of the partner whose file it was. Their assessment of the merits, and of what a court might award, is the main evidence your accountant will rely on.
Measuring the amount
If a provision is needed, IAS 37 says it is measured at the amount the entity would rationally pay to settle the obligation at the end of the reporting period, or to transfer it to a third party at that time. IAS 37 adds that risks and uncertainties are taken into account in that measurement, and that a provision is discounted to its present value.
In practical terms, the question is: if the practice had to make the claim go away on the last day of its financial year, what would a sensible settlement be? That may be well below the amount the former client is demanding. Where a settlement would be paid only years from now, your accountant will consider the effect of discounting.
Professional indemnity cover in the conversation
Most practices carry professional indemnity cover, and the claim may fall within it, subject to an excess and the policy's terms. Tell your accountant about the cover, the excess and the insurers' position on the claim, and give them the policy.
How any expected recovery from insurers is shown is a separate judgment from the provision for the claim itself, and your accountant will apply the standard's rules to it. Do not simply leave the claim out of the accounts on the basis that "the insurers will pay"; the claim and the cover are assessed in their own right.
Recording the provision in Achekam and reviewing it
If a provision is needed, it is posted in Achekam as a manual journal: an expense for the year and a provision liability, in the accounts your accountant chooses. Achekam refuses a journal that does not balance or is dated in a closed month, and a posted journal is corrected only by reversing it, so every change to the estimate leaves a trail.
A provision is not a one-off entry. Review it each month, or at least whenever there is news:
- A settlement offer made or received.
- A court ruling on a preliminary point.
- A change in the defence lawyer's assessment.
- The insurers accepting or declining cover.
Adjust the provision by a further journal when the estimate changes. The management accounts show the effect: an income statement for a chosen period beside the period before, and a balance sheet at period end, built from the practice's own journals and exportable as PDF or CSV. A provision is a large, visible number, so explain it to the partners when the accounts are presented.
If the assessment is that no provision is needed but the claim is possible, no journal is posted, but your accountant still needs the information to write the contingent liability note.
Keep the claim papers together
At year end, the accountant, and any auditor, will want to see the evidence behind the judgment. Keep it in one place:
- The summons and particulars of claim.
- The defence lawyer's written assessment, dated, and each update.
- Correspondence with the insurers, and the policy.
- Settlement offers made and received.
- The partners' minutes recording the assessment.
Achekam's Document Centre is a folder-based store where files and whole folders can be uploaded, previewed, renamed, moved, tagged, archived and searched, and a new version of a file keeps the earlier ones. A dedicated folder for the claim, with each assessment saved as a new version, shows how the view changed over time.
Before the financial statements are finalised
Ask your defence lawyer for a written assessment before year end, share it with your accountant, and agree which of the three answers applies. For how your cover is paid for and accounted, see prepaid professional cover, and for organising matter files, matter files in Document Centre.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
