Page 23 - CIMA MCS Workbook November 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

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 Grapple is liable for, provision should
be made by Grapple for such losses.

If Grapple 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, Grapple may receive
confirmation from its insurers regarding the timing and amount(s) that it will be paid by the
insurer in settlement of any claim made. This may include any payments made directly to third
parties in settlement of their claims, which would otherwise need to be settled by Grapple.

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 Grapple for compensation which
Grapple is contesting and believes that it has a robust defence to the claim.

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
possible, the contingent liability should be disclosed in the financial statements, or ignored
completely if it is regarded as remote.

Given that the machinery was found to be defective, it seems more likely than not that Grapple
will be liable to pay compensation for injury suffered by the employee. A provision should be
made for this amount. Regulators dealing with enforcement of health and safety legislation will
also be interested in this situation, and it is also mo0re likely than not that Grapple will face some
form of punitive sanction, probably a fine, for which a provision should also be made.

Finally, breach of environmental legislation, even if minimal or no harm has resulted is often
based upon the principle strict liability i.e. liability is established, even if no harm has resulted.
Again, a provision should be recognised if it is regarded as probable that a fine will be imposed as
a result of breach of environmental legislation.

Finance Manager

KAPLAN PUBLISHING 113