MFRS137 - Provisions, Contingent Assets and Contingent Liabilities

Tutorial Questions

Question 1

Explain how each of the following items can be reported in the Statement of Financial Position,
stating (i) Description in the SOFP and (ii) Reason

a. Accrued rent expenses

b. Accounts payable
c. Loan from a bank
d. Lawsuits in which the outflow of resources is not probable
e. Lawsuits in which the outflow of resources is probable
f. Warranties to customers
g. Contractual bonus to employees
h. Future operating loss

Item Description in the SOFP Reason

a. Accrued rent expense Accruals under current liabilities The timing and amount of liability are certain

b. Accounts payable Payables under current liabilities The timing and amount of liability are certain
(if payment due is within 12 months)
or non-current liabilities (if payment
due is beyond 12 months)

c. Loan from a bank Non-current liability The timing and amount of liability are certain

d. Lawsuits in which the Not a liability There is no present obligation as the outflow of
outflow of resources is not resources is not probable
probable

e. Lawsuit in which the Liability There is a pressent obligation as the outflow of

outflow of resources is Shown under current liabilities resources is probable
probable or non-current liabilities

f. Warranty to customers Liability There is a present obligation as the outflow of

Shown under current liabilities resources is probable

g. Contractual bonus A liability and it is shown under There is a present obligation as the outflow of
to employees current liabilities resources is probable

h. Future operating loss Not a liability There is no present obligation as the loss is not
incurred
al Position,

amount of liability are certain

amount of liability are certain

amount of liability are certain

ent obligation as the outflow of

ent obligation as the outflow of

nt obligation as the outflow of

nt obligation as the outflow of

ent obligation as the loss is not yet

MFRS137 - Provisions, Contingent Assets and Contingent Liabilities
Tutorial Questions

Question 2
Focus Eye Bhd provides warranties to accompany the sale of its eye glass frames to its customers.
Based on industry experience, it is estimated that the entity would incur RM 140,000 warranty costs in 2019.
Does Focus Eye Bhd have a present obligation and can the amount for provision be estimated reliably?

Solution

1. Focus Eye Bhd has a present obligation (agreement in warranty)

2. arising from a past event (sale of eye glass frames to customers)

3. to rectify defects in the product (probable future outflow)

4. to exchange the defective frame with a new frame (probable future outflow)

5. to make a full refund to its customers (probable future outflow)

6. The amount of provision for warranty can be estimated reliably (RM140,000) by

considering how much it would have to pay to a third party in an outsourcing
contract to take over its obligation to customers
o its customers.
00 warranty costs in 2019.
e estimated reliably?
MFRS137 - Provisions, Contingent Assets and Contingent Liabilities
Tutorial Questions

Question 3

Focus Eye Bhd has a policy of refunding purchases to its dissatisfied customers.
Even though the entity has no legal obligation to do so, the policy of making refunds is made known to the public.
Does Focus Eye Bhd have a constructive obligation and can the amount be estimated reliably?

Solution

1. Focus Eye Bhd has a constructive obligation

2. Even though there is no legal obligation, the policy has created

a valid expectation that dissatisfied customers will be refunded

3. as a result from past event (sale of its products to customers)

4. Future outflow of resources is probable (it is probable that some

of the goods sold will be refunded).

5. Based on its previous experiences, Focus Eye Bhd is able to

estimate the obligation amount reliably.

6. Therefore a provision is recognized in the financial statements of Focus Eye Bhd

ds is made known to the public.
ed reliably?
MFRS137 - Provisions, Contingent Assets and Contingent Liabilities
Tutorial Questions

Question 4

An employee at Focus Eye Bhd has suffered a serious injury while operating laboratory equipment at one of the
entity's outlets.
The employee has filed a lawsuit against Focus Eye Bhd. Based on the evidence of the case, lawyers for Focus Eye B
believe that they will not lose the case. Is there a probable future outflow of resources?

Solution

1. Focus Eye Bhd has a present obligation (the injury occurred at its outlet)

2. Arising from a past event (the injury led to the filing of the lawsuit).

3. However, the future outflow of resources is not probable even if the

lawyers believe that the entity will not lose the case.

4. Therefore there is no provision to be recognized by Focus Eye Bhd

tory equipment at one of the

the case, lawyers for Focus Eye Bhd

MFRS137 - Provisions, Contingent Assets and Contingent Liabilities
Tutorial Questions

Question 5

Focus Eye Bhd uses expected value approach to estimate its provision for repairs.
The company considers the probabilities for repairs of different ranges of frames.
past experiences and future expectations show that 70 percent of goods sold will have no defect.
20 percent of goods sold will have minor defects and 10 percent of goods sold will have major defects.
If minor defects were detected in all products sold, repair costs will be RM 100,000 whereas
if major defects were detected in all products sold, repair cost would be RM 500,000.
Using the expected value approach, show the workings and journal entries to records the provision.

Solution

Type of Probability Cost of Expected

frame of repairs Repairs Repairs
A 0.70 0 0
B 0.20 RM100,000 RM20,000
C 0.10 RM500,000 RM50,000
TOTAL RM70,000

Using the expected value approach, Focus Eye Bhd recognizes a provision
for repairs of RM 70,000.

The journal entries to record the provisions will be as follows:

Debit Credit
RM RM
Dr. Repair Expense 70,000
Cr Provision for Repairs 70,000
(To record the provision for repairs)
ave no defect.
have major defects.

ds the provision.
MFRS137 - Provisions, Contingent Assets and Contingent Liabilities
Tutorial Questions

Question 6

Focus Eye Bhd is taking legal action against Borneo Optic Bhd for failing to deliver on contracts for its product.
The lawsuit is in the final appeal.
The legal advice is that it is probable that they will win the case and will be awarded RM 600,000.
Is it possible for Focus Eye Bhd to recognize this item as an asset?

Solution

1. This is a contingent asset

2. A contingent asset cannot be recognised as an asset

even though the gain is probable and reliably estimated.

3. The gain should only be recognized when it is certain or virtually certain.

4. It is disclosed but care should be taken to avoid misleading information

regarding the likelihood of the gain.
on contracts for its product.

d RM 600,000.
MFRS137 - Provisions, Contingent Assets and Contingent Liabilities
Tutorial Questions

Question 7

During the year to 31 March 20X9, a customer commenced legal proceedings against a company, claiming that one
food products that it manufactures had caused several members of his family to become seriously ill.
The company's lawyers have advised that this action will probably not succeed.

Should the company disclose this in its financial statements?

Solution

1. Legal advice is that the claim is unlikely to succeed.

2. It is unlikely that the company has a present obligation to compensate

the customer and therefore no provision should be recognised by the company in its financial statements.

3. There is however a contingent liability.

4. Unless the possibility of a transfer of economic benefits is remote (less than 30% possible success),
the financial statements should disclose a brief description of the nature
of the contingent liability, an estimate of its financial effect and an indication
of the uncertainties relating to the amount or timing of any outflow.

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.
nst a company, claiming that one of the
ecome seriously ill.

its financial statements.

% possible success),

be accounted for.

way of a note.