Page 19 - CIMA MCS Workbook May 2019 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

was deemed to be defective following investigation by government inspectors, this may result in
liability to pay fines. If it was established that the crane operator was not following established
procedures, this may result in Jord Homes having liability for the actions of the crane operator, in
addition to the crane operator potentially facing criminal prosecution.

Similarly, those suffering loss, damage or injury as a result of the accident may have a claim
against Jord Homes if it was demonstrated to have responsibility for the accident. Persons
suffering injury as a consequence of the accident will be able to claim compensation for injury and
other loss suffered, such as loss of earnings as a result of not being able to work.

In terms of reliable measurement, insurance companies and loss assessors should be able to
quantify the cost of any compensation that may be payable for injury suffered. Human resources
staff will be able to quantify the loss of earnings based upon annual earnings and expected period
of absence from work. Reliable measurement of the compensation for injury suffered should be
quantifiable based upon communication with lawyers and insurers who will have experience and
expertise of other similar situations and claims.

Each claim should be considered on its individual merits and a provision made for each, as
appropriate. The provision should be the minimum unavoidable amount required to settle a claim
and should be discounted to its present value if the time value of money is a relevant factor. The
carrying amount of a provision should be reviewed annually and adjusted as necessary until it is
either settled or it is established that it is no longer probable that there will be a future outflow of
economic benefits.

If it is established that there are any uninsured losses that Jord Homes is liable for, provision
should be made for such losses.

If Jord Homes makes any claims against its insurance policies to cover losses suffered by third
parties or itself, the extent of any insurance pay‐out would be regarded as a contingent asset. A
contingent asset is a possible asset that arises from a past event, and whose existence will only be
confirmed by the occurrence of one or more events outside of the control of the entity.

A contingent asset should only be recognised in the financial statements if it is virtually certain
that there will be a future inflow of economic benefits. For example, Jord Homes may receive
confirmation from its insurers regarding the timing and amount(s) that it will be paid by the
insurer in settlement of the claim. This may include any payments made directly to third parties in
settlement of their claims, which would otherwise need to be settled by Jord Homes.

A contingent liability is a possible liability that arises from a past event, and whose existence will
only be confirmed by the occurrence of one or more events outside of the control of the entity.
An example of a contingent liability is a claim made against Jord Homes for compensation which it
is contesting. This could arise, for example, if another employee said that they suffered ‘shock
and nervous reaction’ as a result of witnessing the accident and Jord Homes is contenting the
compensation claim made by that employee.

A contingent liability should be recognised in the financial statements if it is either virtually certain
or probable that it will result in a future outflow of economic benefits. If it is regarded as only

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