Question

Entity A has a possible asset that satisfies the definition of a contingent asset in terms of IAS 37. The asset satisfies one criterion of the recognition criteria in that is can be reliably measured but fails the other in that the inflow of economic benefits at year end is not probable.

In terms of IAS 37, how should the company Entity A account for this asset?
A. Take no action.
B. Recognise as an asset.
C. Disclose as a contingent asset.
D. Disclose the nature of the asset.

Answer 1

Entity A should disclose the potential asset as a contingent asset per IAS 37, as it is not probable that the economic benefits will inflow at the year-end and it should not be recognized on the balance sheet.

Step-by-step explanation:

In terms of IAS 37, Entity A should account for the contingent asset by disclosing it as a contingent asset. Since the inflow of economic benefits is not viewed as probable, the contingent asset should not be recognized on the balance sheet.

However, it is important to disclose the nature of the potential asset because it could have a significant impact on the financial decisions of the users of the financial statements. Detailed information about the nature of the contingent asset and an estimate of its financial effect should be disclosed unless such a disclosure can be expected to prejudice seriously the position of the entity in a dispute with other parties.