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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Marlow Co is claiming $90,000 compensation from a supplier for faulty goods. At the reporting date its lawyers say that receiving the money is probable but not virtually certain. How should Marlow treat the claim in its financial statements?

Marlow should disclose a contingent asset in the notes. IAS 37 permits recognising an asset only when the inflow is virtually certain. Since receipt is only probable, the claim is disclosed but not recognised, which keeps income from being overstated through prudent treatment of uncertain gains.

  1. ARecognise a receivable and income of $90,000
  2. BDisclose a contingent asset in the notesCorrect
  3. CReduce the cost of goods by $90,000
  4. DIgnore it with no disclosure

Explanation

Under IAS 37 a contingent asset is not recognised; it is disclosed in the notes when an inflow is probable. Recognition as an asset only occurs when the inflow is virtually certain. Here it is only probable, so recognising $90,000 would be premature.

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