Melville Ltd received a material claim for damages from a customer for not delivering ordered goods on time.The customer insists that Melville Ltd's late delivery resulted in significant losses to the customer.Melville Ltd 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 AASB 137?
A) Ignore the claim.
B) Recognise the minimum amount of the liability.
C) Recognise the maximum amount of the liability.
D) Recognise the best estimate of the liability.

Question

Quizplus · Accepted Answer

According to AASB 137, the appropriate accounting treatment for such claims is to recognize the best estimate of the liability. Melville Ltd should estimate the amount it is most likely to pay in settlement of the claim and recognize that as a liability on its balance sheet. This estimate should take into account all available information and should be reviewed and updated regularly. Failure to recognize the liability could result in misleading financial statements. On the other hand, recognizing the maximum amount of the liability would be inappropriate, as it is unlikely that Melville Ltd would have to pay the full amount claimed by the customer. Similarly, ignoring the claim or recognizing only the minimum amount of the liability would not reflect the true financial position of the company.

Melville Ltd Received a Material Claim for Damages from a Customer