Question

Mr. Aqeem is a new accounting officer of MMA Bhd. During his early tenure in the company, one of the Mr. Aqeem’s tasks is to analyse and provide opinion on an issue pertaining to the company’s litigation risk. Below is some of the relevant information to be scrutinised by him. In the year 2019, MMA Bhd has introduced a new sport bike called MX-31 through a press conference in Kuala Lumpur. However, one of its competitors, Vroom Bhd claimed that the sport bike was identical to Vroom Bhd’s product. Thus, Vroom Bhd has filed a lawsuit of RM25M against MAA Bhd for patent infringement. Based on the recent development and evidences provided by Vroom Bhd, it seems that the probable outcome of the proceeding would be 95% unfavorable to MMA Bhd. Thus, the MMA Bhd’s legal team advised that the most likely result of the court case is that the company will lose the case and has to pay RM25 million.

The company accounting period ends on 31 December.

You are required to:

1.         Based on the above information, identify the probable issue faced by Mr.Aqeem            (Problem identification).

2.         Analyse the lawsuit case by referring to the MFRS 137 Provisions, Contingent Liabilities and Contingent Assets (Problem analysis).

3.         Advice Mr. Aqeem on the right accounting treatment that should be taken regarding      the lawsuit case for the year 2019 (provide justification(s)) (Generation of solution, evaluation and decision making).

Answer 1

Fact of the Case: AS per the Scenario Stated above, The MAA Bhd. has launched the product through press conference , which is further claimed by the rival company as infrimgment of its patent product. Law Suit filed agaisnt the MAA Bhd. agaisnt such launch for a value of upto RM 25 Million. As per the MAA Bhd legal advisor clearly states that the law suit may the plantiff rose against us and MAA bhd may lose this courtship , Probabaility as per the legal advisor is to the approximate of 95%

1.         Based on the above information, identify the probable issue faced by Mr.Aqeem : Here the situation occurs in front of Mr. Aqeem is whether to show the RM 25 Million as contingent liability or marked provision against such liability. Treatmen of such law suit as per GAAP should be well treated.

2. Analyse the lawsuit case: A complete analysis of the Case and legal advisor it is well stated that It is not probabale , their is possibility that we are have to pay our competitors compensatroy or penalty for use of patents without permission. As per IAS 37, it is stated that an activity which lead to flow of economic benefit due to some past event and same can be estimated reliabiliy then same should be treated as provision and shall be provided in books, Seconldy opposite to that will be treated as contingent liability and same is required to be disclosed to approximate estimation in FS as footnote and not impact of the same shall be given in books of accounts.

3.         Advice Mr. Aqeem on the right accounting treatment that should be taken regarding      the lawsuit case for the year 2019: AS per the above discussion it can be concluded that same shall be treated as Obligation and shall be provided in books as legal advisor are 95% assure about the decision of the case, it is better to follow th eprinciple of COnservatism. Hence RM 25 Million is required to be provided in books.

Law Suit Liability A/c Dr. ( P and L item)

To Provision for Law Suit Liability A/c ( Balancesheet Item)