CA Intermediate · Advanced Accounting · Framework for Preparation and Presentation of Financial Statements

Kaveri Textiles Ltd. has a reliable estimate that a customer, Mehta Traders, will not pay a Rs 4,00,000 debt that is currently shown as a receivable. The company therefore creates a provision for doubtful debts instead of continuing to show the full amount as an asset. Which qualitative characteristic or element recognition criterion of the Framework is most directly applied in measuring the receivable at its expected recoverable amount?

The receivable is shown at its expected recoverable amount because an asset is recognised only where future economic benefits are probable and measurable reliably. The portion expected to be uncollectible no longer meets that recognition test, so a provision reduces the carrying amount.

1. AThe asset must be reported only if future economic benefits are probable and the item can be measured reliably, so the unrecoverable portion no longer qualifies as an assetCorrect
2. BRevenue is recognised only when cash is received, so the receivable is reduced
3. CItems must be shown on a gross basis, so the debt is reported at full invoice value
4. DHistorical cost requires receivables to stay at the original invoice value until legally written off