Suci bhd is a company that produces and sells industrial chemical products.

For the year ended 30 th

June 2017, following events occurred:
a) In December 2016, one of Suci bhd customer filed a lawsuit against the company due to
injury while using one of the company’s products. The company’s lawyer was in the opinion
that it is possible that the company will lose the case. The lawyer also estimated that the
chances of the company to be liable for compensation amounting RM 50,000 is 40%.

 There is a present obligation (legal obligation) as a result of past event due to the lawsuit
filed against the company for injury caused while using the products.
 There is a possible outflow (not probable) of resource as the lawyer indicates that the
possibility of the company to lose the case is 40%
 Meanwhile, there is a reliable estimate of RM50,000
 However, no provision should be recognized but the company should disclose this as a
contingent liability in the notes to the financial statement.

b) In February 2017, while constructing the company’s new factory in Pahang, the construction
caused a blockage to the drainage system. Th local residents made a complaint of an
uncomfortable smell caused by the blockage. Base on the past practice, the company has been
taking responsibilities to clean up any contamination caused by its activities that could harm
the environment. It is estimated that the cost of clean up will be RM20,000.

 There is a present obligation – constructive obligation (based company’s past

practices to clean up) as a result of past event (contamination and uncomfortable
smell caused by blockage).
 There is a probable outflow of resources as the company has been taking
responsibilities to clean up the blockage.
 A reliable estimate can be made of RM20,000.
 Therefore, a provision for clean up shall be recognised.

c) In March 2017, the company was again confronted with another legal suit for injury suffered
from using one of the company’s products. However, for this case, the company’s lawyer
believes that the customer was at fault as he failed to follow the operating instructions. It is
highly certain that the company will win the case as the company had never accounted such
case previously.

 There is a present obligation (legal obligation) arising from past event due to the
lawsuit filed by a customer against the company’s product that were claimed to cause
injury.
 There is no probable outflow of resources as the lawyer expects that the company will
win the case, regarded as highly certain as the customer was at fault.
 No provisions shall be recognised and no disclosure shall be recognised and no
disclosure shall be made.
 d) In April 2017, Anuar, oner of the company’s senior workers was involved in an accident
while performing his work. The company made a public announcement that it will
compensate Anuar an amount totalling RM30,000. This is to show the company’s
appreciation towards its loyal employees.

 There is a present obligation (constructive obligation) as a result of past event due

public announcement made by the company to compensate the worker that was
involved with accident.
 There is a probable outflow of resources the company will compensate Anuar, the
worker.
 In addition, there is a reliable estimate of RM30,000
 Hence, a provision for compensation shall be recognised and shown as a liability
in financial statement.

Example 2
Kotmemeth gives warranties at the time of sale to its customer of its electrical product during the year
ended 30th April 20x8. Under the terms of the contract for sale the manufacturer undertakes to make
good, by repairing or replacing and manufacturing defects that become apparent within three years
from the date of sale. On past experience, it is probable (more likely than not) that there will be some
claims under the warranties. Base on the previous experience and evidence, the company estimate that
the amount of RM15,000 is the outflow of the obligation expected.

 There is a present obligation as a result of past obligating event- the obligating event is the
sale of the product with a warranty, which gives rise to a legal obligation.
 An outflow of resources to settle the obligation is probable as there will be some claims
under the warranties.
 The company is almost certain that a reliable estimate of RM15,000 is the expected outflow
required to settle the obligation. A provision for warranties is recognised as a liability in the
financial statement.

Example 3
During the year, Kotmemeth operates in a country where there is no environmental legislation, the
company has established a constructive obligation by setting a valid expectation to other parties as the
entity has widely published environmental policy in which it undertakes to clean up all contamination
that it causes, the entity has a record of honouring this published policy. A reliable estimate of
RM30,000 can be made of any outflows expected to clean up the contamination caused.

 There is a present obligation as a result of past obligating event- the obligating event is the
contamination of the land, which gives rise to a constructive obligation, because the conduct
of the entity has created a valid expectation on the part of those affected by it that the entity
will discharge its responsibility- to clean up contamination caused.
 An outflow of resources to settle the obligation is probable as the entity has a record of
honouring this published policy.
 A reliable estimate can be made at RM30,000 in settling the clean up cost of the
contaminated land.
Example 4
YH Bhd in the process of finalizing its financial statements for the year ended 30 June 20x9. On July
20x9, the owner of the adjacent building filed a case against YH claiming RM500,000. The claim is
made in respect of severe damage of his building during a fire incident in YH heads office in June
20x9. He is of the view that YH was negligent in maintaining fire safety systems in head office.
According, to YHs lawyer, there is 70% probability that YH would be found negligent and would
need to pay 40% of the amount claimed.

 There is present obligation arising from past event which gives rise to a legal
obligation. The owner of adjacent building filed a case against YH claiming damage
of RM 500,000 due to fire incident in June 20x9.
 Outflow of economic benefits is probable, the company’s lawyer are at the option that
YH 70% chances (more likely than not) of being found negligent.
 Reliable estimate is also available RM200,000 (40%x RM500,000 of amount
claimed.
 A provision for damage of RM 200K needs to be recognized in financial statement.

Example 5
During the year ended 30 June 20x8, one of Bintang Bhd employee was injured while
working. The employee took legal action and sought damages of RM 100K. Bintang Bhd
has taken legal advice and is confident that the company will be held liable but amount
payable is questionable.
 There is a present obligation as a result of past obligating event- due to the legal action filed
against the company by an employee that was injured while working.
 An outflow of resources to settle the obligation is probable as the entity will be held liable
(more likely than not)
 A reliable estimate cannot be made as the amount of obligation payable is questionable.
 The company should not recognise a Provision but only disclose this as a contingent
liability.

Example 6: Not a Contingent Liability

Sonshine Bhd preparing its financial statement for the year ended 31st Dec 20x4. Sonshine
Bhd es-sales director, who was dismissed on 15 Dec 20x4, has lodged a claim for
RM100,000 for unfair dismissal. Sonshine Bhd legal advisors believe that the probability of
Sonshine Bhd losing the case is remote as the claim by the ex-sales director is baseless.
 The liability is a possible obligation arising from past event (the dismissal had
taken place by the year end)
 The probability of success of the legal claim made will be determined by occurrence
or non-occurrence of one or more uncertain future events that’s is not within the
control of the entity.
  The legal advisor believes that success is unlikely, that the possibility of success is in
fact remote and baseless.
 No action/ disclosure in the notes to the financial statement

Example 7: Contingent Asset

Synergy Resources Bhd is finalising its financial statement for the year ended 31 Dec 20x8.
The company sued its main supplier for RM1,500,000 damages for unreliable supply of
materials which has halted its production. As at the year end, a judgement was given in
favour of Synergy Resources Bhd. The company’s lawyer was of the option that it was
highly probable that the company would receive the compensation.
 There is a possible asset arising from past event- legal suit filed against its main
supplier for compensation to be paid.
 The inflow of economic benefits is probable (more likely than not) as the
company’s lawyer were of the option that it is highly probable that the company will
receive a compensation of RM 1,500,000 as the judgement is given in favour of the
entity.
 This meet the definition of a contingent asset because the judgement given in the
hearing is not within the control of the entity
 A contingent asset should be disclosed in the notes to the financial statement.

Example 8: Not a Contingent Asset

Same facts as example 7, but Legal advisor of the company is virtually certain that the court
judgement will order the competitor to pay damages to the entity.
 The entity shall recognise the compensation receivable as an ASSET
 It is not a contingent asset because the inflow of economic benefits of
RM1.500,000 (the compensation income) to the entity is virtually certain as
judgement is given in favour of Synergy Bhd.
 As is not probable, this removes the contingency and the contingent asset also is
not disclosed in the notes to account