Virtually certain (contingent) asset becomes probable only

All topics related to IFRS Standards.
Post Reply
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Virtually certain (contingent) asset becomes probable only

Post by Marek Muc »

Entity A wins a court case and expects to receive $1 million from Entity B. Entity B plans to file a claim to the Supreme Court, but at 31 Dec 20X1 Entity A assesses that it is virtually certain (probability at 95%) that it will receive this $1 million from Entity B (for this discussion let’s assume that this assessment is correct). In 20X2, it turns out that the Supreme Court states that this case needs to be reconsidered by lower court. Entity A still believes that the probability of winning and receiving $1 million is high (probability at 70%), but it is no longer virtually certain.

Do you think we are still in the scope of IAS 37 in 20X2? If the asset is no longer virtually certain, we should derecognise it entirely in 20X2? Or maybe once recognised, it goes out of the scope of IAS 37 for good, and in 20X2 we simply need to test it for impairment under IAS 36? Or maybe a different approach comes to mind?
User avatar
exIFRS
Trusted Expert
Posts: 234
Joined: 01 Mar 2020, 08:44
Location: London

Re: Virtually certain (contingent) asset becomes probable only

Post by exIFRS »

Interesting. IAS37.33 is pretty clear, when realisation of income becomes virtually certain, the related asset is not a contingent asset and recognition is appropriate. So the IAS37.35 requirements for continual reassessment wouldn't apply.

It is presumably an Intangible Asset as opposed to a Financial Asset as it is statutory not contractual. So IAS 36 impairment applies. Though I wonder if any organisation would want to acknowledge that they admit their chance of winning has decreased, or via impairment that they "accept a lower award". I suspect the prudent thing to do would be to disclose a contingent asset.

I have seen in some IFRS document in the past that the threshold for recognition for assets is high (as in this case) but the threshold for derecognition is even higher, so once recognised an asset should not simply be derecognised because it no longer meets the recognition criteria. Rather you follow the requirements of the relevant standard. But I can't put my finger on the relevant document.

Interestingly the EY Manual effectively says 95% is too low a threshold for virtually certain, they argue it must be so close to 100% certain as to effectively make it indistinguishable.

That being said a study conducted in Australia and Korea of preparers and auditors, indicated they thought virtually certain was around 90 - 95% certain. Though in fairness the Korean preparers effectively thought that Virtually Certain, Highly Probable and Reasonable Certain all meant the same thing. I have attached the paper if anyone is interested.

https://www.aasb.gov.au/admin/file/cont ... IFR....pdf
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: Virtually certain (contingent) asset becomes probable only

Post by Marek Muc »

I agree with your view. However I can imagine that one could argue, still based on IAS 37.33, that once the realisation of income is no longer virtually certain, it is a contingent asset again. You are not required to reassess under IAS 37.35, but reassessment can be triggered by external factors, e.g. court decision.

I also agree with EY when they say that it's hard to reliably determine exact probability when we're close to 100%. But still there's some difference between 'certain' and 'virtually certain'.

I will have a look at the paper that you attached, thanks! (PS I replaced the attachment with link due to copyright concerns...)

And I will be happy to hear other members' thoughts!
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: Virtually certain (contingent) asset becomes probable only

Post by Marek Muc »

PS.
exIFRS wrote: 01 Dec 2020, 18:16 It is presumably an Intangible Asset as opposed to a Financial Asset as it is statutory not contractual.
I would say that contractual assets can also be disputed before the court. But the mere fact that we looked into IAS 37 in the first place implies that this is non-contractual, otherwise it wouldn't be in the scope of IAS 37 in the first place, however fiercely disputed between parties. Do you agree?
User avatar
exIFRS
Trusted Expert
Posts: 234
Joined: 01 Mar 2020, 08:44
Location: London

Re: Virtually certain (contingent) asset becomes probable only

Post by exIFRS »

Marek Muc wrote: 01 Dec 2020, 19:32
I would say that contractual assets can also be disputed before the court. But the mere fact that we looked into IAS 37 in the first place implies that this is non-contractual, otherwise it wouldn't be in the scope of IAS 37 in the first place, however fiercely disputed between parties. Do you agree?
Yes I think you are generally beyond the contract once you get into court awards.
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: Virtually certain (contingent) asset becomes probable only

Post by JRSB »

I can see a danger in asking people in Korea what they consider certain words and phrases to mean, even if translated well.
User avatar
Marek Muc
Site Admin
Posts: 3228
Joined: 15 Oct 2018, 17:21
Contact:

Re: Virtually certain (contingent) asset becomes probable only

Post by Marek Muc »

exIFRS wrote: 01 Dec 2020, 21:13 Yes I think you are generally beyond the contract once you get into court awards.
hm, sometimes you have to fight for contractual assets before the court too. But even then, I think that IAS 37 and the virtually certain threshold do not apply.
Post Reply