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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

At the reporting date, Karo Co has a possible gain from a claim against a supplier. Lawyers say the receipt of $80,000 is probable, but not virtually certain. What is the correct treatment under IAS 37?

Karo should disclose a contingent asset in the notes. An inflow that is probable but not virtually certain is not recognised in the financial statements; recognition requires virtual certainty, in line with prudence under IAS 37.

  1. ARecognise a receivable and income of $80,000
  2. BDisclose a contingent asset in the notesCorrect
  3. CRecognise a provision of $80,000
  4. DIgnore it entirely because the amount is uncertain

Explanation

A contingent asset is disclosed in the notes when an inflow is probable. It is recognised in the statements only when realisation is virtually certain, at which point it is no longer a contingent asset. Here the inflow is probable but not virtually certain, so disclosure applies.

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