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

Orion plc is claiming $2m compensation from a supplier for defective goods. At the reporting date, Orion's lawyers say it is probable that the claim will succeed, but the court has not yet ruled and the supplier disputes liability. Which treatment complies with IAS 37?

Orion should disclose a contingent asset and recognise nothing in the statement of financial position. An inflow that is merely probable does not qualify for recognition under IAS 37, which requires virtual certainty, but disclosure is required when inflow is probable.

  1. ARecognise a $2m asset and income immediately
  2. BRecognise a $2m asset with the credit to deferred income
  3. CDisclose a contingent asset and recognise nothing in the statement of financial positionCorrect
  4. DMake no disclosure because contingent assets are never disclosed

Explanation

IAS 37 prohibits recognising contingent assets. Where an inflow of economic benefits is probable, the contingent asset is disclosed in the notes. Recognition occurs only when realisation is virtually certain, which is not the case while the supplier disputes liability.

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