- This topic has 3 replies, 2 voices, and was last updated 8 years ago by
.
- Posts
Hi sir, please could you help me with the rationale to not making a contingent liability for point D please. And my comment about point B
Which ONE of the following would require a provision to be created by BW at its
statement of financial position date of 31 October 20X5?A The government introduced new laws on data protection which come into force on 1
January 20X6. BW’s directors have agreed that this will require a large number of staff to
be retrained. At 31 October 20X5, the directors were waiting on a report they had
commissioned that would identify the actual training requirements.– ok so here law comes into play after reporting date.. therefore no present obligation. no provision
B At the statement of financial position date, BW is negotiating with its insurance
provider about the amount of an insurance claim that it had filed. On 20 November 20X5,
the insurance provider agreed to pay $200,000.– *SIR- “we are not “virtually certain” we will receive the money… so do not recognise.. however since we are negotiating.. and a reliable estimate has been provided we will make a provision for contingent asset. Sir is this the right rationale?
C BW makes refunds to customers for any goods returned within 30 days of sale, and has
done so for many years.– constructive obligation
D A customer is suing BW for damages alleged to have been caused by BW’s product.
BW is contesting the claim and, at 31 October 20X5, the directors have been advised by
BW’s legal advisers it is very unlikely to lose the case– my issue lies here. it is very unlikely that we will lose the case. so it means it is probable we will win? why are we not making a provision for this? is it because the costs for the claim have not been reliably measured? what’s the rationale?
thanks
Hi,
Welcome to Open Tuition. I hope you enjoy studying with us and find the materials useful.
For B, if the letter received from the insurance provider has stated that we will receive the $200,000 then it is virtually certain that we will receive the cash. It is highly unlikely that the insurer would send the letter and then not pay out. We would therefore recognise an asset in the financial statements. We only ever disclose a contingent asset, once it becomes virtually certain the contingent element no longer exists and so we now have an asset.
For D, you’re correct in that we are going to win the case, so if that’s the likely outcome why would we provide for anything as we’re not going to have to pay anything? The rationale is that there is no obligation as we’ll win the case.
Hope this helps.
Thanks
Point b- ok so because we have been given a letter and told the exact amount.. its virtually certain we will receive the cash.. hence we can recognise… like you said,.. it is unlikely.. that the insuer would send the letter and not pay.
ok makes sense. thanks
point d- ok..i read the question wrong.. since we are going to win the case.. why would we make a provision for it in the books. ok clear.
thanks. for prompt reply. I will tell all my cima friends about open tuition. it is great!!! Is there a way we can donate to open tuition?
- You must be logged in to reply to this topic.