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CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Anita Foods Ltd. is preparing its statements. Items: (i) a flood damaged a warehouse after year end, causing a probable Rs 3,00,000 loss that is not an adjusting event; (ii) a lawsuit from before year end, expected to cause an outflow, has a reliable estimate of Rs 2,00,000; (iii) a possible gain of Rs 1,00,000 from a claim that is only possible. Looking at recognition under the Framework and its prudence, how much amount will be recognised as expense/liability in the current year's profit and loss, assuming the flood loss is only disclosed?

Rs 2,00,000 is recognised. The lawsuit arises from a past event, outflow is probable and the amount is reliably estimated. The flood loss arose after the year end and is only disclosed, and the possible gain is not recognised because prudence forbids anticipating income.

  1. ARs 2,00,000Correct
  2. BRs 5,00,000
  3. CRs 3,00,000
  4. DRs 1,00,000

Explanation

Only the lawsuit meets recognition: a present obligation from a past event, probable outflow, reliable estimate, so Rs 2,00,000 is recognised. The flood is a non-adjusting post-balance-sheet event (disclosure only). The possible gain is not recognised, since prudence prevents anticipating income. Rs 5,00,000 wrongly adds the flood loss.

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