MFRS 137 PROVISIONS, CONTINGENT LIABILITIES LIABILITIE S AND CONTINGENT ASSETS
Learning Objectives Definition and accounting treatment on provisions, contingent liabilities and contingent assets. Understanding the appropriat Understanding app ropriate e recognition criteria and measurement bases applied to provisions, contingent liabilities and contingent assets. Application of the use of recognition and measurement rule in specific cases.
MFRS 137 MFRS 137 discusses three situations, which are: a. Provi visi sion onss b. Con Conting tingent ent liabi liabilitie lities, s, and c. Co Con nti ting ngen entt asse assets ts
Characteristics of Liabilities A liability is defined as ‘a present obligation of the enterprise arising from past events, the settlement is expected to result in an outflow from the enterprise of resources embodying economic benefits’. Probable future sacrifices of economic benefits.
Arise from present obligations to other entities.
Result from past transactions or events.
PROVISIONS Provisions is defined as “liabilities of uncertain
timing or amount or both”.
However, provisions are different from liabilities – such as accruals & payables.
Provisions are uncertain on the timing or amount of future expenditure required in settlement.
PROVISIONS : Recognition Criteria Provisions should be recognised when:
a. an enterprise has a present obligation (legal or constructive) as a result of past event; b. it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and
c. a reliable estimate can be made of the amount of the obligation.
PROVISIONS : Present Obligation 1st recognition criteria : present obligation arises from past event (obligating event). There are Two types of obligation :
Legal obligation
Constructive obligation
Factors to consider :
Past Event
Outflow of Economic Resources
Reliable Estimate
PROVISIONS : Present Obligation Legal obligation Derives from a contract, legislations or other operation of law. Example: Obligation to replace the defective parts for car sold as stated in the sales agreement. The obligation arises only when the legislation is virtually certain to be enacted.
PROVISIONS : Present Obligation Illustration 137.1 ABC Bhd is an oil exploratory company. It causes contamination but cleans up only when required to do so under the laws of the company concerned. One country in which ABC Bhd operates has had no legislation requiring cleaning up, and ABC Bhd has been contaminating land in that country for several years. At 31 Dec 2012 it is virtually certain that a draft law requiring a clean up of land already contaminated will be enacted shortly after the year end.
In this case, there is a present obligation as a result of a past obligating event . The obligating event is the contamination of the land because of the virtual certainty of legislation requiring cleaning up.
PROVISIONS : Present Obligation Constructive obligation Derives from an entity’s actions
By an established pattern of past practice, published policies or a sufficiently specific current statement, the entity has indicated to other parties that it will accept certain responsibilities;
Thus, created a valid expectation on the part of those other parties that it will discharge those responsibilities.
Example:
By practice, the company pays two months bonus to its current employees even though there is no contract to do so.
A logging company by practice plants new trees after it has logged a certain area though there is no legal requirement to do so.
PROVISIONS : Present Obligation Illustration 137.2 ABC Bhd is an oil exploratory company. It operates in a country where there is no environmental legislation. However, the company has a widely published environmental policy in which it undertakes to clean up all contamination that it causes. The enterprise has a record of honouring this published policy.
In this case, the conduct of company has created a valid expectation on the part of those affected by it that it will clean up the contamination. There is therefore a constructive obligation arising from the past obligating event (the contamination of the land).
PROVISIONS : Present Obligation Constructive Obligation A management or board decision does not give rise to a constructive obligation at the balance sheet date unless the decision has been communicated before the balance sheet date to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the enterprise will discharge its responsibilities.
PROVISIONS : Present Obligation Illustration 137.3 On 12 Dec 20x2, the Board of XYZ Bhd decided to close down a division. Before the balance sheet date (31 Dec 20x2), the decision was not communicated to any of those affected and no other steps were taken to implement the decision.
In this case, there is no obligation as at 31 December 20x2, and therefore no provision should be recognised.
PROVISIONS : Present Obligation Illustration 137.4 On 12 Dec 20x2, the Board of XYZ Bhd decided to close down a division making a particular product. On 20 Dec 20x2, a detail plan for closing down the division was agreed by the board; letters were sent to customers warning them to seek an alternative source of supply and redundancy notices were sent to staff of the division.
In this case, the communication of the decision to the customers and employees gives rise to a constructive obligation because it creates a valid expectation that the division will be closed. If the other two criteria are met, a provision should be recognised at 31 December 20X2 for the best estimate of the costs of closing the division.
PROVISIONS : Past Events The past events that leads to a present obligation is called an obligating event. Obligating event : An event that creates a legal or constructive obligations that results in an enterprise having no realistic alternative to settling that obligation created by the event. This is the case only:
Where the settlement of the obligation can be enforced by law; or
In the case of constructive obligation, where the event creates valid expectation in other parties that the entity will discharge the obligation.
PROVISIONS : Past Events MFRS 137 disallows recognition of provisions merely on the basis of management intent. A provisions is recognised only when an enterprise has no realistic alternative to settling the obligation created by the past obligation event. Where the enterprise can avoid the future outflow by its future action (e.g: sale of the related asset), it has no present obligation for the future outflow and no provisions should be recognised.
PROVISIONS : Past Events Example 1 A ship may need to undertake major overhaul, repairs and maintenance (dry-docking expenditure) that would cost millions once in every five years. However, no provision for dry-docking expenditure shall be recognised until the expenditure is incurred.
PROVISIONS : Outflow of Resources 2nd recognition criteria : there should be a probable outflow of resources embodying economic benefits. An outflow of resources is regarded as probable if the outflow is more likely than not to occur, ie, the probability that the outflow will occur is greater than the probability that it will not. Where there are a number of similar obligations (eg product warranties), the probability that an outflow will be required is determined by considering the class of obligation as a whole.
PROVISIONS :Outflow of Resources Illustration 137.7
DEF Bhd gives warranties at the time of sale to purchase of its product to repair or replace any defects within one years from the date of sale. On past experience, it is probable that there will be some claims under the warranties.
In this case, since it is probable that there will be an outflow of resources under the warranties as a whole, and assuming all the other recognition criteria are met, a provisions should be recognised.
PROVISIONS : Reliable Estimate 3rd recognition criteria : reliable estimate can be made of the amount of obligation. To be reliably estimate, an enterprise should be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is sufficiently reliable to use. An obligation that arises from past events but is not recognized as a provision because it does not meet the second and/or third recognition criteria should be disclosed as contingent liability unless the possibility of an outflow of resources is remote;.
PROVISIONS : Reliable Estimate Example 2 of textbook: A car dealer gives free car service for two years on cars purchased from its outlet. •
There is a legal obligation to provide free car service when cars are purchased. •
If the cost of the free service can be reliably estimated, then the company has to recognise the obligation when the cars are sold. •
PROVISIONS : Measurement The
amount recognised as a provision should be the best estimate (expected value) of the expenditure required to settle the present obligation at the balance sheet date;
The estimates of the outcome and
amount are determined by judgment of the management, based on past experience of similar transactions, and at times even from reports from independent experts
PROVISIONS : Measurement In circumstances where the provision being estimated involves involv es a large population of items, the obligation is estimated by weighing all possible outcomes by their associated probabilities. This may include the use of the statistical statistical method of ‘expected value’. For example, when estimating a provision for product warranties, warra nties, a range of possible outcomes and their probabilities may be used to arrive at the expected cost of warranties.
PROVISIONS: Measurement Illus Illustr trati ation on 137.8 137.8 LMN Bhd sells goods with warranty warranty under which the company company will repair any defects that become apparent within the first six months after purchase. Based on past experience, it is estimated that if minor defects were were detected in all the goods sold, repair cost of RM100,000 would result, but if major defects were detected for all the goods sold, repair costs of RM500,000 will result. For the current year, the company expects 75% of the goods to have no defect, 20% with minor defects and 5% with major defects. In this case, the amount of the provisions for defects defects will be determined as follows:
PROVISIONS: Measurement Illu Illust strrat atio ion n 137.8 137.8 (con (cont. t.)) In this case, the amount of the provisions for defects will be determined as follows: = RM (75% x nil + 20% x 100,000 + 5% x 500,000) = 0 + R M2 0 , 0 0 0 + R M2 5, 0 0 0 = RM45,0 5,000
PROVISIONS: Measurement MFRS 137 requires that an enterprise should, in measuring a provision : a. take risks and uncertainties into account ;
Assessment of risks & uncertainties should be made by an entity in determining the best estimates for the amount of provision.
Risk adjustment will increase amount of liability
b. discount the provisions, where the effect of the time value of money is material ;
Where the time value of money is material, the amount of provision should be based on the present value of the expenditure required to settle the obligation.
The entity should use pre-tax discount rate that reflects the current market assessment of the time value of money and the risks specific to the liability.
PROVISIONS: Measurement Example 6 of textbook (Time Value): Race Cars Bhd sells cars on which it gives a five-year warranty and free service for three years. In year x4, it sold 100 cars. It has to estimate the amount of probable expenses that it would incur on warranties for five years and the cost of services for the three years. The warranties and free services are obligations when the cars were sold. The company’s cost of capital is 10%.
In year x5, the amount spent was RM17,000 in respect of the 100 cars sold in year x4. Suppose the company makes the following estimates on future expenses:
PROVISIONS: Measurement Warranties
Services
Total
Discount
Present value
Discount
Present value
factor
End x4
factor
End x5
RM
RM
RM
RM
RM
RM
RM
x5
10,000
8,000
18,000
1
18,000
x6
12,000
8,000
20,000
.909
18,180
1
20,000
x7
16,000
2,000
18,000
.826
14,868
.909
16,362
x8
20,000
nil
20,000
.751
15,020
.826
16,520
x9
15,000
nil
15,000
.683
10,245
.751
11,265
76,313 In year x4: In Income statement charged as expenses: Provisions RM76,313 Balance Sheet Current liability RM18,000 Non current liability RM58 313
64,147
PROVISIONS: Measurement In Year x5In
Debit RM
Provisions for warranties & services
Credit RM
18,000
Cash/payables, etc
17,000
Income statement
1,000
(Actual expenses incurred is less by RM1,000) Income statement/finance cost (RM58,313 x 10%)
Provision for warranties and services (Unwinding of interest)
In year x5: Income Statement Interest RM58,313 x 10% = RM5,831 Unused provision (credit) RM1,000 Balance Sheet Current liability
RM20,000
5,831
5,831
PROVISIONS: Measurement MFRS 137 requires that an enterprise should, in measuring provisions take
future events, such as changes in the law and technological changes into account where there is sufficient objective evidence that they will occur; not
to take gains from the expected disposal of assets into account in measuring provision, even if the expected disposal is closely linked to the event giving rise to the provision
PROVISIONS : Reimbursement There could be a situations where some or all of the expenditure required to settle the provision may be expected to be recovered from a third party. Examples : insurance contracts, indemnity clause or suppliers’ warranties
MFRS 137 provides that should the entity should: Recognised the
reimbursement when and only when it is virtually certain that reimbursement will be received if the entity settles the obligation. However, the amount recognised for the reimbursement should not be more than the amount of the provision . Recognise
the reimbursement as a separate asset. However, in the income statement, the expense relating to a provision may be presented net of the amount recognised for a reimbursement .
PROVISIONS:Reimbursement Illustration 137.9 In December 20x2, STU Bhd (the company) was sued for damages arising from an accident that the Company’s vehicle was involved in. As at its balance sheet date on 31 Dec 20x2, the Company’s retainer lawyers advised that it was probable the company would loose the case and would have to pay a damage amounting to RM200,000.
However, the vehicle was insured and it is virtually certain the company would recover RM150,000 from the insurance company.
PROVISIONS:Reimbursement Illustration 137.9 (cont.)
In this case, the company would record the following adjusting entries: Dr : Loss arising from accident
200,000
Cr : Provision for accident loss
200,000
Dr : Amount receivable from insurance 150,000 Cr : Gain from insurance
150,000
In the statement of comprehensive income, the net loss of RM50,000 will be charged as “Other losses”. In the balance sheet, the provision account will be presented as a current liability item, and the receivable account as a current asset item.
Changes in PROVISIONS MFRS 137 provides that provisions should be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligations (obligations no longer required), the provision should be reversed. Provision should be used only for expenditures for which the provision was originally recognised.
Changes in PROVISIONS Example As at the beginning of the current financial year 20x9, LTK Bhd has two provision accounts : (i)lawsuit claims provision of RM10 million, and (ii)warranty provision of RM30 million. During the year, the lawsuit claims were settled at RM12 million. Some warranty costs were incurred during the year and the warranty provision was increased to RM40 million at year end in tandem with the increase in products sold during the year. Required: Explain how the settlement of the lawsuit claims shall be accounted for.
Changes in PROVISIONS Solution The shortfall arising from settlement of the lawsuit claims shall be recognised immediately as an expense in profit or loss. It shall not be offset against the balance in the warranty provision. The journal entry to recognise the shortfall and close the provision account is as follow: Dr. Claim Expenses in Profit and Loss Dr. Lawsuit claims Provision Cr. Cash / Payable
RM2 mil 10 mil RM12 mil
PROVISIONS
–
SPECIFIC CASES
MFRS 137 further explains how the general recognition and measurement requirements for provisions should be applied in three specific cases: a.Future operating losses
b.Onerous contracts c.Restructuring
PROVISIONS Future operating losses
An entity cannot make a provision for future operating losses as future operating losses do not meet the definition of a liability.
An expectation of future operating losses is an indication that certain assets of the operation may be impaired. (MFRS136 Impairment of Assets)
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Example
PROVISIONS Future operating losses
The manufacturing plant of ABC Bhd has been incurring losses in the past three years. Management is contemplating the option of either to restructure the plant or to sell it to an external party. Management believes that losses will continue for another two years at about RM30 million per year before the business operation could turnaround. At year end, neither the restructuring plan nor the plan to sell was finalised. The carrying amount of the net assets of the plant at year end was RM400 million. Based on its current condition, the recoverable amount of the plant was estimated at RM350 million. Required Explain the accounting treatment that shall be accorded to the above case.
Solution
PROVISIONS Future operating losses
Notwithstanding that the operations of the plant may be restructured or that it may be sold to an external party, the estimated future losses of RM60 million shall not be recognised as a liability because there is no present obligation at the end of the reporting period, ie. There is no obligating event. However, based on the impairment test performed, the plant shall be written down to its recoverable amount of RM350 million and the impairment loss of RM50 million recognised as an expense in the current year’s profit or loss. Carrying amount = RM400 million Recoverable amount = RM350 million
Choose lower RM350 million
Carrying amount to reduce to RM350 million Impairment loss = RM400 million – RM350 mil = RM50 mil
PROVISIONS - Onerous contract
An onerous contract is one in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it.
Unavoidable cost is the net cost of exiting from the contract which is the lower of cost of fulfilling the contract and penalties/compensation as failure to fulfill contract.
If an entity has a contract that is onerous, a provision should be recognised for the present obligation under the contract based on the unavoidable costs.
However, before provision is recognised, the standard requires an entity to recognise any impairment losses for any dedicated assets to the contract.
PROVISIONS- Onerous contract Illustration 137.10 PQR Bhd operates profitable from a factory that it has leased under an operating lease. During Dec 20x2 the enterprise relocates its operations to a new factory. The lease on the old factory continues for the next four years, it cannot be cancelled and the factory cannot be re-let to another user.
In this case, there is a onerous contract. The obligating event is the signing of the lease contract, which gives rise to a legal obligation. An outflow of resources embodying economic benefits in settlement - When the lease becomes onerous, an outflow of resources embodying economic benefits is probable. Conclusion - A provision is recognised for the best estimate of the unavoidable lease payments.
PROVISIONS- Onerous contract Example 7 of textbook
Hire Bhd entered into an operating lease contract to rent a building for five years at an annual rental of RM1 million. A year after entering the lease, operations of Hire Bhd was relocated. Hire Bhd was unable to terminate the contract.
In this case, the contract can be classified as onerous. In year 2 of the contract, Hire Bhd has to make the best estimate of the unavoidable lease payments. It will be the present value of RM4 million. The rental paid is debited to the provision account.
PROVISIONS - Restructuring A programme that is planned and controlled by management, and materially changes either:
the scope of a business undertaken by an entity, or
The manner in which that business is conducted.
Example: Sale or abandonment of a line of business,
•
Closure of business location,
•
Changes in management structure and fundamental reorganisation that have a material effect on the nature and focus of the entity’s operations. •
PROVISIONS - Restructuring MFRS 137 provides that a provision is recognised only when the general recognition criteria for provisions are met and a constructive obligation to restructure arises only when an enterprise: a. has a detailed formal plan for the restructuring identifying at least: - the business or part of the business concerned, - the principal locations to be affected, - the location, function & approximate number of employees who will be compensated for terminating their services, - the expenditure that will be undertaken. - the time when the plan will be implemented.
PROVISIONS - Restructuring b.has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it. Implementing a restructuring plan or a public announcement of a detailed plan to restructure before the year-end is an evidence of restructuring. If implementing a restructuring plan or a public announcement of a detailed plan to restructure is done after the year-end, then the entity is to make a disclosure if the restructuring is material and non-disclosure would influence the economic decisions taken by users of financial statement.
PROVISIONS - Restructuring A restructuring provision shall include only the direct expenditures arising from the restructuring, which are those that are both: (a) necessarily entailed by the restructuring; and (b) not associated with the ongoing activities of the entity. A restructuring provision does not include such costs as: (a) retraining or relocating continuing staff; (b) marketing; or (c) investment in new systems and distribution networks.
PROVISIONS - Restructuring These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the end of the reporting period. Such expenditures are recognised on the same basis as if they arose independently of a restructuring. Besides, the future operating losses up to the date of a restructuring are not included in a provision, unless they relate to an onerous contract.
PROVISIONS - Restructuring Example 9 of textbook On 23 September x5, the Board of an entity decided to close down divisions A and B that made two particular products. The entity’s year-ended 31 December. Division A The closure cost is estimated at RM600,000. The closure decision was not communicated to any of those affected and no steps have been taken to implement the decision.
In this case, as at the year-end, the entity has no obligation since the decision has not been communicated to those involved. Hence, the estimated closure costs of RM600,000 will be disclosed as an event after balance sheet date. No provision is recognised.
PROVISIONS - Restructuring Example 9 of textbook (cont.) On 23 September x5, the Board of an entity decided to close down divisions A and B that made two particular products. The entity’s year -ended 31 December. Division B The closure cost is estimated at RM400,000. A detailed plan for the closing down has been agreed upon by the Board on 15 Dec x5 and redundancy notices were sent to the staff.
In this case, as at the year-end, the employee have an expectation that the closure will happen. Therefore the provision of RM400,000 should be recognised.
DISCLOSURE - Provision An entity shall disclose the following for each class of provision: a.a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits; b.an indication of the uncertainties about the amount or timing of those outflows. Where necessary to provide adequate information, an entity shall disclose the major assumptions made concerning future events, and c.the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement. 51
DISCLOSURE - Provision For each class of provision, an entity shall disclose: a.the carrying amount at the beginning and end of the period; b.additional provisions made in the period, including increases to existing provisions; c.amounts used (ie incurred and charged against the provision) during the period; d.unused amounts reversed during the period; and e.the increase during the period in the discounted amount arising from the passage of time and the effect of any change in the discount rate. Comparative figure is not required. 52
DISCLOSURE - Provision Example
Balance at beginning
xxx
Additional / Increases in Provision
xxx
Amounts used
(xx)
Amounts released unused
(xx)
Finance costs (if discounted) + charge in profit or loss
xxx
Balance at end
xxx
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CONTINGENCIES Events or outcome which is determined by
other events whose outcomes are uncertain. Classified into:
- Contingent liability; - Contingent asset
CONTINGENT LIABILITIES MFRS 137 defined Contingent Liability as:
A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the enterprise; or
A present obligation that arises from past events but is not recognised because: 1. it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; 2. the amount of the obligation cannot be measured with sufficient reliability.
CONTINGENT LIABILITIES Contingent liabilities in MFRS137 is restricted to possible obligations and obligations for which it is not probable that an outflow of resources embodying economic benefits will occur, or for which the amount cannot be estimated reliably. Contingent liabilities should not be recognised. Contingent liabilities should be disclosed in the notes to accounts, unless the possibility of outflow of resources embodying economic benefits is remote. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognised in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made).
Provision vs Contingent Liability •
A provision is a type of liability ie a present obligation exists and it is probable that economic benefit will flow from the entity. The liability however is of uncertain timing or amount.
By contrast a contingent liability can arise in three situation: •
•
•
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Where a possible obligation exists (as opposed to a probable obligation) Where there is a present obligation but it is not recognised as it is not probable that economic benefit will flow from the entity (with a provision outflow is probable) Where there is a present obligation but the obligation cannot be measured with sufficient reliability (with a provision the amount may be uncertain but is capable of reliable estimation)
CONTINGENT LIABILITIES - Recognition Contingent liabilities can be classified as to: Probable, Possible, or Remote – – –
Probable contingent liability A contingent liability that is probable is considered a liability. Possible contingent liability Possible contingent liabilities should not be recognised but disclosed. Remote Ignore
Entity has to determine by judgement if a contingency is a probable or possible or remote. 58
CONTINGENT LIABILITIES Probable contingent liability
A contingent liability that is probable is considered a liability.
If the amount can be estimated reliably it should be accounted for.
If the amount cannot be estimated reliably, then a disclosure by way note is to be made.
Possible contingent liability
Possible contingent liability should not be recognised.
A disclosure is made in the financial statement by way of a note if a contingent liability is possible but not remote.
Remote contingent liability
If the contingent liability is remote it need not be disclosed.
Disclosure – CONTINGENT LIABILITIES MFRS 137 requires disclosures of the following information; •
•
•
•
a brief description of the nature of the contingent liability; an estimate of its financial effect, an indication of the uncertainties relating to the amount or timing of any outflow, and the possibility of any reimbursement.
CONTINGENT LIABILITIES Example of disclosures of contingent liability;
32 Contingent Liability Company 20X4
20X3
RM
RM
Corporate guarantee given to banks for credit facilities granted to subsidiaries (unsecured)
64,843,200
71,904,200
PROVISION vs CONTINGENT LIABILITIES Generally, all provisions are contingent liabilities as there
is uncertainty about the timing and amount. However, MFRS 137 uses the term ‘provision’ to cover
contingencies that are recognised as liabilities in the statement of financial position. The term ‘contingent’ is used for liabilities and assets that
are not recognised either because their likelihood of crystallisation is only possible or remote, or because they fail the recognition criteria such as reliable estimate of the amount cannot be made.
PROVISION vs CONTINGENT LIABILITIES Example 3 of textbook An employee was injured while carrying out his job function. He has taken legal action and the outcome is uncertain.
In this case the entity has to determine if it has a liability. There is a past event but the obligation is uncertain. If there is a probability that the entity will be held liable, then there is an obligation. The entity has to make a reliable estimate of the cost to be incurred. Assuming it is able to estimate reliably the cost, then the entity has a liability and has to accrue it. If the entity is unable to estimate the cost then it has to make a disclosure of the fact.
CONTINGENT ASSETS MFRS 137 defines Contingent Assets 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 enterprise. MFRS 137 provides that contingent assets should
not be recognized .
should
be disclosed where it is probable that the gain will be realised or where inflow of economic benefits is probable . gain
contingencies which are possible or remote shall not be disclosed. This requirement is basically an application of the prudence consideration because a contingent asset may result in the recognition of income which may never be realised.
Gain Contingencies With the provisions of MFRS137 and also the conservatism principle, contingent assets are seldom disclosed in financial statements.
Note that the prior rules have supported the recording of LOSS contingencies.
As a general rule, we never record GAIN contingencies.
CONTINGENT ASSETS In rare circumstance where the realisation of a contingent gain is virtually certain, then such gain is not a contingency and its recognition of the asset is appropriate. Example A legal suit filed against a third party has been ruled in favour of the entity and the decision is known before the financial statements are authorised for issue. In this case, the amount recoverable from the third party shall be recognised because the gain is no longer a contingency.
CONTINGENT ASSETS Example 4 of textbook In Nov x3, a poultry farmer had to destroy all his poultry due to a government order to contain the spread of the avian flu. On 15 Dec x3, the government made a press statement stating that it would pay compensation to all poultry farmers. On 10 July x4, the farmer received a letter specifying the amount he would received.
Can the farmer recognise an asset in x3? In this case the farmer has virtually certain of the receipt. A press statement is not evidence of the virtually certain situation. However, it can recognise the asset in x4 on receipt of the document confirming the receipt.
Disclosure - CONTINGENT ASSETS MFRS 137requires disclosures of a
brief description of the nature of the contingent asset; and an estimate of its
financial effect (if this is not disclosed due to not practicable to do so, then the fact should be stated).
CONTINGENT ASSETS 34 Contingent Assets Group 20X4 RM’000
Company 20X3
RM’000
20X4
RM’000
20X3
RM’000
Differences between the amount claimed and the amount awarded by the Government in respect of the land acquired or utilised by the Government
1,590
3,184
1,483
-
Tutorial Question Questions from Jane Lazar & Huang Ching Choo. 2014. Financial Reporting Standards for Malaysia. 4th Edition – Chapter 38 Question 3
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Question 4
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Question 5
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Question 6
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Lecture Exercise
