At the end of the financial period, Rosella Limited was awaiting the final details of a court case for damages awarded in its favour. The amount and possible receipt of damages is unknown and will not be decided until the court sits again in approximately three months' time. How should Rosella Limited recognise this situation when preparing the financial statements?

A) Disclose in the notes to the financial statements as it is possible that the entity will receive the damages and the court decision is out of its control.
B) Do not recognise or disclose in the financial statements as the possibility of receiving damages is remote.
C) Recognise as an asset in the financial statements as the receipt of damages is probable.
D) Recognise as a deferred asset in the statement of financial position and re-classify as a non-current asset when the court decision is known.

Question

Abdulaziz Buhazzaa · Accepted Answer

Final Answer : A, Explanation :  The best choice is to disclose in the notes to the financial statements as it is possible that the entity will receive the damages and the court decision is out of its control. This is in accordance with the principle of materiality, which requires that all material facts should be disclosed in the financial statements. The receipt of damages is not certain, but it is possible and relevant to the financial statements. Therefore, it should be disclosed in the notes to the financial statements to provide users with relevant information to make informed decisions. The other options are not appropriate because the possibility of receiving damages is not remote, and it is not certain that the receipt of damages is probable. Recognising it as an asset or deferred asset would not be appropriate either, as there is no certainty of receiving the damages.

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