Melville Plc received a material claim for damages from a customer for not delivering ordered goods on time.The customer insists that Melville Plc's late delivery resulted in significant losses to the customer.Melville Plc admits to the delay but disputes the material damages being claimed.What is the appropriate accounting treatment for the claim that is in accordance with IAS 37?

Question

Quizplus · Accepted Answer

According to IAS 37, a provision should be recognized when an entity has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. In this case, Melville Plc has a legal obligation as a result of a past event (delayed delivery) and it is probable that an outflow of resources will be required to settle the claim. Therefore, Melville Plc should recognize a provision for the best estimate of the liability.

Melville Plc Received a Material Claim for Damages from a Customer