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ACCA Applied Knowledge · Financial Accounting · Qualitative characteristics of useful financial information

At the year end, Zeta Co is unsure whether it will win a court case. Its legal advisers say a gain of $200,000 is possible but not virtually certain. The directors propose recognising the $200,000 as income, arguing that the claim is relevant to users. Which treatment is consistent with IFRS and the Conceptual Framework's approach to prudence and uncertainty?

The gain should not be recognised in profit or loss, because it is not virtually certain. If an inflow is probable it should only be disclosed as a contingent asset. Recognising it, or part of it, would be imprudent and unsupported by IFRS.

  1. ARecognise the $200,000 as income because it is relevant
  2. BRecognise $100,000 as income, being half of the possible gain
  3. CDo not recognise the gain in profit or loss; at most disclose it as a contingent asset if an inflow is probableCorrect
  4. DRecognise the gain as a liability until the case is decided

Explanation

A possible gain is not recognised as an asset or income until realisation is virtually certain. If an inflow is probable it is disclosed as a contingent asset. Recognising half of it has no basis, and treating a gain as a liability is incorrect. Caution under uncertainty does not mean deliberate bias, but it does mean not recognising unrealised, uncertain gains.

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