1.

Allowances for receivables

1.1. Doubtful debts

Irrecoverable debts are specific debts which are definitely not expected to be paid. However, there may
be some debts which the business thinks might not be paid; these are known as doubtful debts.

A doubtful debt is a debt which is possibly irrecoverable.

1.2. Accounting treatment in the financial statements

The accounting treatment for an allowance for receivables is as follows.

(a) When an allowance is first made, the amount of this initial allowance is charged as an expense in the
statement of profit or loss for the period in which the allowance is created.

(b) When an allowance already exists, but is subsequently increased in size, the amount of the increase
in allowance is charged as an expense in the statement of profit or loss for the period in which the
increased allowance is made.

(c) When an allowance already exists, but is subsequently reduced in size, the amount of the decrease in
allowance is credited back to the statement of profit or loss for the period in which the reduction in
allowance is made.

1.3. Determining the allowance for receivables

The methods of determining the allowance for trade receivables fall under IAS 39/IFRS 9. In F3, the
allowance for receivables is likely to be expressed simply as a percentage of trade receivables, eg 'an
allowance equivalent to 2% of trade receivables'.

Provisions and contingencies

1. Provisions

IAS 37 states that a provision should be recognised (which simply means 'included') as a liability in the
financial statements when all three of the following conditions are met.

An entity has a present obligation (legal or constructive) as a result of a past event.

It is probable (ie more than 50% likely) that a transfer of economic benefits will be required to settle
the obligation.

A reliable estimate can be made of the obligation.

1.1. Accounting treatment for provision

DEBIT Expenses (statement of profit or loss)

CREDIT Provisions (statement of financial position)

2. Contingent liability and contingent assets

 Degree of Probability Contingent Liability Contingent Asset

Virtually certain Recognize as an expense and a Recognize as income or

(Probability above 95%) liability asset
Probable Recognize as an expense and a Disclose by a note
(Probability above 50% and up to 95%) liability
Possible Disclose by a note No disclosure
(Probability above 5% to 50%)
Remote No disclosure No disclosure
(Probability below 5%)

2.1. Contingent liability

IAS 37 defines a contingent liability as:

A possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of
the entity; or

A present obligation that arises from past events but is not recognised because:

– it is not probable that a transfer of economic benefits will be required to settle the obligation; or

– the amount of the obligation cannot be measured with sufficient reliability.'

Contingent liabilities should not be recognised in financial statements but they should be disclosed in
the notes.!!!

2.2. Contingent assets

IAS 37 defines a contingent asset as:

A possible asset that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of
the entity'.

A contingent asset must not be recognised in the accounts, but should be disclosed if it is probable that
the economic benefits associated with the asset will flow to the entity