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ACCA Applied Skills · Financial Reporting · Provisions and events after the reporting period

Foxtrot Co is being sued by a customer. Foxtrot's lawyers advise that it is probable Foxtrot will lose and must pay damages in a range of $200,000 to $400,000, with each amount in the range equally likely. Foxtrot is also virtually certain to recover $120,000 from its insurer if it pays. How should this be reported in the financial statements?

Foxtrot recognises a provision of $300,000, the midpoint of the equally likely range, and a separate reimbursement asset of $120,000 because recovery is virtually certain. The asset must not be netted against the provision in the statement of financial position.

  1. AProvision $300,000 and a separate receivable of $120,000Correct
  2. BProvision $180,000, being $300,000 net of the insurance recovery
  3. CProvision $400,000 and a contingent asset of $120,000 disclosed
  4. DProvision $300,000 and a receivable of $120,000 netted against it in the statement of financial position

Explanation

For a single obligation with a range of equally likely outcomes, the midpoint of $300,000 is used. Because reimbursement is virtually certain, it is recognised as a separate asset of $120,000, not netted in the statement of financial position. Netting is allowed only in the statement of profit or loss. Disclosing it as a contingent asset is wrong because recovery is virtually certain.

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