Question

The lawyer of a mining company advised that the probability of a successful outcome relating to the entity's law suit for compensation is virtually certain.

In terms of IAS 37, how should the company account for this?
A. Disclose the asset as a contingent asset.
B. Recognise the compensation as an asset.
C. Take no action until the law suit is finalised.
D. Recognise the compensation as a possible asset.

Answer 1

Under IAS 37, since the compensation from the lawsuit is virtually certain, the mining company should recognise the compensation as an asset on the balance sheet. The correct option is B.

Step-by-step explanation:

Under IAS 37, an entity is required to report a contingent asset when the inflow of economic benefits is probable, but it should not be recognised in the financial statements until the realisation of the income is virtually certain.

In this situation, given that the lawyer advised that the probability of a successful outcome from the lawsuit for compensation is virtually certain, the mining company should recognise the compensation as an asset.

Therefore, the correct accounting treatment is to not merely disclose it as a contingent asset. Instead, since the successful outcome is virtually certain, the asset should be recognised on the balance sheet.

The company will need to measure the compensation reliably and it will ultimately be reflected in the financial statements as an asset with corresponding gains in the income statement, once the outcome is confirmed. The correct option is B.