Pelican Limited advised its solicitors to commence an action against its major supplier claiming damages of €500,000 in respect of losses sustained as a result of the supply of faulty goods. According to legal advice, Pelican Limited stands a very good chance of winning its case.

Requirement Indicate how this situation should be dealt with in order to comply with standard accounting practice. (Assume a financial year end of 31 December 1996 and that the issue is material.)