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In PYQ 12/08 Qs1 For the damaged property repair expenses, a provision has been recognised in full but the answer states that the provision is made in error as the damage is already covered by insurance.
In PYQ 12/10 Qs3 the similar condition do appears as the holiday maker had made a claim for compensation and company do not recognise it as it is covered by insurance. However the answer states that the provision should be recognised or if it is contingent then it should be disclosed and contingent asset should be treated as separate event and disclosed by way of note.
This 2 questions is almost similar but the treatment seem different and contradict to each other. Could you please explain to me how to solve this question?
Isn’t it because in the first example there are no other parties involved? This is just a matter of collecting on the insurance in respect of storm damage to a building.
Additionally I presume that there is no obligation on the entity to incur the repairs expanse so the situation does not satisfy the definition of an obligation
In the second example, there is another party involved – the holiday maker – and an obligation DOES exist (provide) or is contingent (disclose)
Furthermore, the holiday maker’s claim may be refuted by the insurance company as being for an event not covered by the insurance policy
Without reading the full questions it seems that the two questions, whilst both involve an insurance claim, are not sufficiently identical to be able to cut and paste the answer from the first into an answer for the second
And there’s the danger of rote learning answers!
Actually I have read the both questions and answers and that’s why I don’t understand the why the answer of PYQ 12/08 is in this way .
In fact the contingent asset should be treated as separate event and asset should be recognised if it is virtually certain that the reimbursement will be received and cannot offset against provision right?‘contingent asset should be treated as separate event and asset should be recognised if it is virtually certain that the reimbursement will be received and cannot offset against provision right?’
Correct – but you didn’t tell me that the insurance receipt was virtually certain!
As a general principle in the whole of accounting there shall be a minimum of netting off
What do you mean by “minimum netting off”? Could you please further explain it with examples some more?
‘What do you mean by “minimum netting off”?’ You’ve given me the illustration yourself! Where an entity is faced with a claim against them but the entity, in turn, has a corresponding claim against a supplier (or insurance entity, or customer) it is not appropriate to net off the claim against the entity with the claim being made by the entity
As your earlier post says: ‘contingent asset should be treated as separate event’
As a general principle, netting off carried to an extreme would have a statement of profit or loss that simply comprised one single line ‘Net profit for the year’ because you’ve netted off all the expenses against all the incomes and arrived at a net figure
OK?
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