Question

Below are given independent situations. For each situation, discuss how the entities should account for the transactions in accordance to MFRS 137- Provisions, Contingent Liabilities and Contingent Assets, giving reasons for your answers. Assume that the accounting year end is 31 December 2018.

​a)During the financial year 2018, White Bhd sued its main supplier for 1.5 million damages for faulty supply of materials which had affected its production. As at the reporting date, a decision was given in favour of the entity. The hearing to determine the amount of damages, however, will only be heard after the reporting date.

​b)Green Bhd has an overseas subsidiary involved in mining activities that caused significant damage to the environment. The mine was situated in the company where there was no environmental regulation requiring the entity to remedy environmental damage. It was estimated that the cost of restoration of the mining site, which was estimated to be in 10 years' time would probably be 15 million.

​c)Blue Bhd sold goods with warranty where customers are covered for the cost of repairs due to manufacturing defects within the first year after purchase. Blue Bhd estimated that the probability of the goods sold with major defects will be 25% and the estimated repair cost would be 2 million.

d) ​Turquoise Bhd was being sued by a customer for RM2 million for breach of contract. Turquoise Bhd had obtained legal opinion that it was not probable Turquoise Bhd would lose the case. Accordingly, Turquoise Bhd had provided RM400,000 which was included in administrative expenses. The unrecoverable legal costs of defending the action were estimated at RM500,000. However, this amount had not yet been provided for as the legal action would only go to court in 2019.

e)On 1 September, an employee of Aqua Bhd sued the entity for the damages regarding serious injuries sustained, as result of a breach of safety regulations. The claim for the damages amounted to RM2 million. Legal advisors of Aqua Bhd reveals that the outcome could be unfavourable. In addition, legal costs incurred during 2018 amounted to RM100,000.

f) ​Crimson Bhd operates a factory in a foreign country where there is no environmental legislation requiring entities to provide for the cost of environmental clean-up. In 2018, the factory operations caused a serious threat to the ecosystem of the nearby river, and the probable clean-up cost was estimated to be RM10 million. Crimson Bhd had taken an insurance policy for environmental damages, and the insurers agreed to pay a compensation of RM7.5 million in January 2019. Crimson Bhd was publicly acclaimed as a socially and environmentally responsible corporate citizen.

Answer 1