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Answers
CHAPTER 8 – PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS
Example 8.1
Answer
C – A liability of $1m will be recorded and a contingent asset should be
disclosed in a note to the financial statements.
Claim against Axe Capital
A provision will be recorded if:
An obligation exists
A probable transfer of economic benefit will occur
The amount can be reliably estimated
A legal obligation would exist if Axe Capital loses the case.
As Axe Capital has a 30% chance of not paying damages, then there is a 70%
chance they will have to pay damages. A probable transfer of economic benefit
will occur.
Therefore, a provision for the potential damages will be recognised.
Counter claim by Axe Capital
The counter claim against a supplier creates an uncertain asset. Uncertain
assets will only be recognised if virtually certain. A contingent asset will be
disclosed if there is a probable receipt of economic benefit. As a result the
$300,000 counter claim should be disclosed as a contingent asset.
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