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- May 6, 2020 at 10:34 am
Sir, for PYQ Sep/Dec 2017 Q1 part (b) “Effect of hurricane”
1. The impairment losses are recognised in full and the compensation from the insurance company only recognise $12.5m? Will another $12.5m need to be disclosed as a contingent asset in the note of FS?
Thank you.May 6, 2020 at 12:45 pm
I would say no.
$25m is the estimated cost of repairs expected to take two months. If that amount was spent before the end of the year $12.5m would presumably be received before the y/e and the remainder would be receivable (under the insurance contract). Both amounts would be credited to profit or loss.
At the other extreme, if the claim is made but no repair costs have yet been incurred at the reporting date I would say that any receipt would be technically repayable and should NOT be credited to profit or loss but presented as deferred income/a liability. (In this way it would be carried forward to be matched with the expense when it is incurred next year.)
In between the extremes of having incurred all expenditure/no expenditure – at the reporting date the company cannot provide for costs not yet incurred – nor can it have a contingent liability for these costs. So there cannot be a contingent asset to recover costs that haven’t been provided for.
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