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
Coasta has placed an order for five vehicles at a cost price of R450 000 per vehicle on 1 December 20.20. At year end, however, all five vehicles have not been delivered and Coasta has not made any payment. Coasta believes it should recognise a liability for the total cost of the vehicles as it has signed a contract with the supplier agreeing to the purchase price of the vehicles.
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
Contingent liability
In this scenario, as Coasta has placed an order for the vehicles but has not yet received them or made any payment, a contingent liability should be recognized in the financial statements for the year ended 31 December 20.20. This is because there is a possible obligation that may arise in the future depending on the outcome of the order, which is not yet certain. Therefore, Coasta should disclose this contingent liability in the notes to the financial statements in accordance with IAS 37 Provisions, contingent liabilities and contingent assets.