You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS Standards). The financial statements for the year ended 31 December 2019 are due to be published shortly. A trainee accountant who is assigned to your department is reviewing the financial statements as part of a training exercise. She has prepared a list of queries arising out of this review.

At a recent board meeting, we discussed legal cases which customers A and B are bringing against Omega in respect of the supply of products which were allegedly faulty. We supplied the goods in the last three months of the financial year. We have reliably estimated that if the actions succeed, we are likely to have to pay out 12 million in damages to customer A and 10 million in damages to customer B. Omegas legal advisers have reliably estimated that there is a 65% chance that customer As claim will be successful and a 20% chance that customer Bs claim will be successful. I know we have insurance in place to cover us against claims like this. It is highly probable that any claims which were successful would be covered under our policy. Therefore I would have expected to see a provision for legal claims based on the likelihood of the claims succeeding. However, I would also have expected to see an equivalent asset in respect of amounts recoverable from the insurance company. The financial statements do contain a provision for 12 million but no equivalent asset. Disclosure of the information relating to both of the claims and the associated insurance is made in the notes to the financial statements. How can it be the correct accounting treatment to include a liability but not the corresponding asset, given the above facts?.

Required:

1. Provide answers to the queries raised by the trainee. You should justify your answers with reference to relevant IFRS Standards.

(20 Marks) (350 words).

2. Discuss, with the reference IAS 37: Provisions, Contingent Liabilities and Contingent Assets and the relevant literature, how the managerial judgments on the recognition of the provision affects the usefulness of the information.

(25 Marks) (400 words)