Question

In: Accounting

Provide the guidelines an auditor would recognize a loss provision as required by accounting standards in...

Provide the guidelines an auditor would recognize a loss provision as required by accounting standards in Malaysia.

[8 marks]

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Expert Solution

MASB Standard 20 is the relevant accounting standard for accounting Provisions, Contingent Liabilities and Contingent Assets in Malaysia.

The Standard defines provisions as liabilities of uncertain timing or amount. A provision should be recognised when, and only when:

(a) an enterprise has a present obligation (legal or constructive) as a result of a past event;

(b) it is probable (i.e. more likely than not) 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. The Standard notes that it is only in extremely rare cases that a reliable estimate will not be possible.

3 MASB 20 evidence, it is more likely than not that a present obligation exists at the balance sheet date. An enterprise recognises a provision for that present obligation if the other recognition criteria described above are met. If it is more likely than not that no present obligation exists, the enterprise discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote.

The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date, in other words, the amount that an enterprise would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party at that time.

The Standard requires that an enterprise should, in measuring a provision:

(a) take risks and uncertainties into account. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities;

(b) discount the provision, where the effect of the time value of money is material, using a pre-tax discount rate (or rates) that reflect(s) current market assessments of the time value of money and those risks specific to the liability that have not been reflected in the best estimate of the expenditure. Where discounting is used, the increase in the provision due to the passage of time is recognised as borrowing costs;

(c) take future events, such as changes in the law and technological changes, into account where there is sufficient objective evidence that they will occur; and

(d) not take gains from the expected disposal of assets into account, even if the expected disposal is closely linked to the event giving rise to the provision.


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