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ACCA Strategic Professional · Strategic Business Reporting (International) · Discussion of issues in financial reporting

Karlo Co has a contractual right to receive a cash refund of $2 million from a supplier, but recovery is uncertain: management estimates only a very low probability of receipt. Under the current Conceptual Framework, which statement best describes the recognition position?

Recognition depends on whether it provides relevant information and a faithful representation. The current Framework has no explicit probability threshold in the asset definition, but a very low probability of inflow, with high measurement uncertainty, may mean recognising the asset would not be useful, so it may not be recognised.

  1. ARecognise the asset only if inflow is probable, because probability is a formal recognition threshold
  2. BDo not recognise any asset, because an asset must be a physical resource
  3. CRecognise the asset at $2 million in all cases because the right exists
  4. DAssess whether recognition gives relevant information and a faithful representation; a very low probability of inflow may mean it does notCorrect

Explanation

The 2018 Framework defines an asset as a present economic resource controlled as a result of past events, with potential to produce benefits. It removes the probability threshold from the definition, but recognition requires relevant information and faithful representation, which low probability and high measurement uncertainty may prevent. Option A reflects the old framework.

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