Coasta Ltd (“Coasta”) is a medium size company operating in South Africa. Coasta’s directors are unsure how to treat a number of potential transactions in the financial statements for the year ended 31 December 20.20. Details of one of the independent transactions are provided below:

Question

Coasta Ltd (“Coasta”) is a medium size company operating in South Africa. Coasta’s directors are unsure how to treat a number of potential transactions in the financial statements for the year ended 31 December 20.20. Details of one of the independent transactions are provided below:

Possible transaction

As a result of theft of inventory in Coasta’s warehouse, Coasta was not able to fulfill some of its orders to its customers as per agreement. One of Coasta’s customers has decided to sue Coasta for loss of income due to Coasta’s failure to supply its order timeously. At year end, Coasta’s lawyers have indicated that there is a possibility, based on precedent, that the customer’s claim could be successful.

Required:

How will the above event be identified in terms of IAS 37 Provisions, contingent liabilities and contingent assets, in the records of Coasta Ltd for the year ended 31 February 20.21.

Contingent asset

Contingent liability

Provision

None of the above

Answer 1

The event described would be identified as a contingent liability in the records of Coasta Ltd for the year ended 31 December 20.20. This is because there is a possible obligation that arises from past events (the theft of inventory) and it will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events (the outcome of the lawsuit). As such, a provision is not recognized at this stage because the outcome is uncertain. The contingent liability will be disclosed in the financial statements as required by IAS 37.