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ACCA Strategic Professional · Strategic Business Reporting (International) · Provisions, contingencies and events after the reporting period

Orion plc has claimed $800,000 from an insurer for fire damage to a warehouse. At the reporting date the insurer has neither accepted nor rejected the claim. Orion's lawyers say receipt is probable, but not virtually certain. What is the correct IAS 37 treatment?

Orion should disclose a contingent asset in the notes. Recognition requires the inflow to be virtually certain, and here it is only probable. IAS 37 therefore requires note disclosure rather than recognising a receivable or income.

  1. ARecognise a receivable of $800,000 and income
  2. BDisclose a contingent asset in the notesCorrect
  3. CRecognise a receivable of $400,000 as a prudent estimate
  4. DMake no disclosure because a contingent asset is never disclosed

Explanation

A contingent asset is not recognised unless realisation is virtually certain. Where an inflow is probable, it is disclosed in the notes. Recognising it would breach IAS 37, and disclosure is not prohibited.

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