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ACCA Applied Knowledge · Financial Accounting · The context and purpose of financial statements for external reporting

Dara Co has a receivable from a customer, Eli, that is now probably irrecoverable. Which statement correctly describes how Dara should treat the item, using the Conceptual Framework definition of an asset?

The receivable should be written off or provided against, because an asset must be expected to produce future economic benefits. If the cash is probably not coming in, the receivable no longer meets the asset definition to that extent, even though the legal right to claim still exists.

  1. AThe receivable no longer meets the asset definition to the extent that future economic benefits are not expected, so it is written off or allowed forCorrect
  2. BThe receivable remains an asset at full value because Dara still has a legal right to payment
  3. CThe receivable becomes a liability because Eli owes Dara money that will not be received
  4. DThe receivable is shown as equity until the dispute is resolved

Explanation

An asset is a present economic resource controlled by the entity as a result of past events, with potential to produce economic benefits. Where cash is not expected to flow in, the carrying amount must be reduced via irrecoverable debt write-off or allowance. A legal right alone does not justify full carrying value when benefits are not expected.

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