Corporate Reporting- MFRS137, IAS37 Provisions, Contingent Liabilities, Contingent assets

1. CORPORATE REPORTIN
DayanaMasturaFCCA(UK),CA(M)

2. MFRS 137 – PROVISIONS, CONTINGENT
LIABILITIES & CONTINGENT ASSETS
At the financial year end there could be events or situations where the
outcome is uncertain or dependent on another event taking place, which
may affect the financial position or performance of the reporting period.
In this topic under MFRS 137 we will discuss on three items:
1.Provisions
2. Contingent liabilities
3. Contingent assets
WATCH IT ON YOUTUBE – MFRS137 (Malaysian)
https://www.youtube.com/watch?v=tt-7oSZ5ZCs
WATCH IT ON YOUTUBE – IAS 37 (International)
https://www.youtube.com/watch?v=cM9YQUegKUs

3. MFRS 137 – PROVISIONS, CONTINGENT
LIABILITIES & CONTINGENT ASSETS
PROVISION
• a liability of uncertain timing or amount
• Present obligation but the payment date / amount to be paid is
uncertain
• Financial statements should include all information necessary
and all uncertainties must be accounted for consistently
• Provision for doubtful debts, provision for warranties
RECOGNITION OF PROVISIONS:
• An entity has a present obligation 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
• A reliable estimate can be made of the amount of the obligation

4. EXAMPLE - PROVISION FOR WARRANTY
ABC Bhd sells goods with a warranty under which the customers
are covered for the cost of repairs of any manufacturing defects
within six months of purchase.
ABC estimates that for minor defects, the repair will cost RM1.4
million and major repairs will cost RM3 million.
The entity’s past experience and future expectation indicate that
there is an 80% probability that the goods will have no defects,
15% minor repairs and 5% major repairs.
Required:
Determine whether the entity has to accrue any expenses and
liability and of so, how much should be provided for?

5. EXAMPLE - PROVISION FOR WARRANTY(SOLUTION)
The entity has a present legal obligation as a result of selling the
goods.
The obligation is the warranty provided.
The amount of warranty cost to ABC Bhd has to be estimated and
the best estimate would be as follows:
(80% x 0) + (15% x RM1.4 million) + (5% x RM3 million)
= 0 + 210,000 + 150,000
= RM 360,000

6. CONTINGENCIES – CONTINGENT ASSET
MFRS DEFINITION:
• A possible ASSET that arises from past events and whose
existence will be confirmed only on the occurrence or non-
occurrence of one or more uncertain future events not wholly
within the control of the entity
CLASSIFICATIONS:
• Virtually certain – the related asset and income are recognised
• Probable – a disclosure is required as it is probable there will be
an inflow of economic benefits
• Possible and remote – not recognised and not disclosed too

7. EXAMPLE – CONTINGENT ASSET
In November 2016, a poultry farmer had to destroy all his poultry
due to a government order to contain the spread of the avian
flu.
On 15 December 2016, the government made a press statement
stating that it would pay a compensation to all the poultry
farmers.
On 10 July 2017, the farmer received a letter specifying the amount
he would receive.
Required:
Can the farmer recognise the asset in 2016?

8. CONTINGENCIES – CONTINGENT ASSET
(SOLUTION)
The farmer has to be virtually certain of the receipt.
A press statement is not an evidence of a virtually certain situation.
In 2016 a press statement was released but is not a strong
evidence and can be classified as possible and remote, in which
no recognition and disclosures are required.
In 2017, the farmer received a letter confirming the amount he
would receive, which is considered as virtually certain.
Therefore in 2017 he can recognise the asset on the receipt of the
document confirming the compensation.

9. CONTINGENCIES – CONTINGENT LIABILITIES
MFRS DEFINITION:
• A possible OBLIGATION that arises from past events and whose
existence will be confirmed only on the occurrence or non-occurrence
of one or more uncertain future events not wholly within the control of
the entity
RECOGNITION:
• Probable– considered a liability. If the amount can be estimated reliably
it should be accounted for. Guidance – if it is more than 50% then it is
probable
• Possible – should not be recognised but a disclosure should be made in
the FS by a way of a note. Guidance – if it is below than 50% then it is
possible
• Remote – Guidance – if it is less than 30% then it is remote. It need not
be disclosed.

10. EXAMPLE – CONTINGENT LIABILITIES
A company is engaged in a legal dispute. The outcome is yet unknown.
A number of possibilities arise:
• On 1 January 2016 possible damages are RM 100,000 but it is not
expected to have to pay them.
• On 3rd March 2016 the company is expected to have to pay the damages
but is unable to estimate the amount in which the RM100,000 estimated
earlier could be wrong.
• On 5th June 2016, the lawyers informed that the company may not be at
fault and could be acquitted.
• On 10th August the court announced that the company has to pay
damages of RM250,000 to the victim.
Required:
State the possible obligations if any as per MFRS 137 for each of the
situations above.

11. EXAMPLE – CONTINGENT LIABILITIES
(SOLUTION)
A company is engaged in a legal dispute. The outcome is yet
unknown.
A number of possibilities arise:
• On 1 January 2016 possible damages are RM 100,000 but it is
not expected to have to pay them. – Possible contingent
liability, disclose by way of a note
• On 3rd March 2016 the company is expected to have to pay the
damages but is unable to estimate the amount in which the
RM100,000 estimated earlier could be wrong. - Possible
contingent liability, disclose by way of a note
• On 5th June 2016, the lawyers informed that the company may
not be at fault and could be acquitted. – Remote contingent
liability. No disclosure needed.
• On 10th August the court announced that the company has to
pay damages of RM250,000 to the victim. – Probable contingent
liability. The amount can be estimated reliably and should be
accounted for.

12. QUESTION & ANSWER SESSION