EXAMPLE 1

In November 2019, an employee of Ramesh Bhd was injured while carrying

on an official duty. He has filed a claim for damages from the company to the
amount of RM1 million.
Legal advice was sought by the company and there are two scenarios:
60% chance – company will be held liable for RM500,000
40% chance – company will be held liable for RM1 million
ANALYSIS OF EVENT
Scenario 1
 OBLIGATING PAST EVENT?
 Employee filed claim for damages
 PRESENT OBLIGATION?
 Legal obligation – law exists
 PROBABLE OUTFLOW OF RESOURCES?
 More than 50% chance
 RELIABLE ESTIMATED AMOUNT?
 RM500,000
ANALYSIS OF EVENT
Scenario 2
 OBLIGATING PAST EVENT?
 Employee filed claim for damages
 PRESENT OBLIGATION?
 Legal obligation – law exists
 PROBABLE OUTFLOW OF RESOURCES?
 40% chance
 RELIABLE ESTIMATED AMOUNT?
 RM1,000,000
ACCOUNTING TREATMENT - SCENARIO
1
1. Accounting treatment
Ramesh Bhd has to recognize a provision for damages claimed by the
employee. There is present obligation due to a past event (employee has
filed for damages due to injury), that will result in probable outflow of
economic benefits (more than 50% chance) and the amount can be
measured reliably (RM500,000 determined by the lawyers).

2. Journal entries
Dr. Operating expense – SOPL 500,000
Cr. Provision for damages 500,000
ACCOUNTING TREATMENT - SCENARIO
2
1. Accounting treatment
Ramesh Bhd has to disclosed as contingent liability which claimed by the
employee. There is present obligation due to a past event (employee has
filed for damages due to injury). However, the probability to happen is less
than 50% chance that will result in probable outflow of economic benefits.
The amount can be measured reliably (RM1,000,000 determined by the
lawyers).
2. Journal entries
No journal entries recorded. Company need to disclosed as contingent
liability amounted to RM1,000,000 in the notes to the financial statement.
EXAMPLE 2

Asuh Bhd operates one of its factories in a foreign country where no

environmental law exists. The company, however, claims to be a socially and
environmentally responsible corporate citizen. The factory operations have
seriously hurt the river’s ecosystem during the current year 2019.
The probable cleanup costs has been estimated at RM1,500,000.
 ANALYSIS OF EVENT

 OBLIGATING PAST EVENT?

 Damage done to the river’s ecosystem
 PRESENT OBLIGATION?
 Constructive obligation – company’s reputation
 PROBABLE OUTFLOW OF RESOURCES?
 More than 50% chance (claim to be ecofriendly)
 RELIABLE ESTIMATED AMOUNT?
 RM1,500,000
ACCOUNTING TREATMENT - SCENARIO 1
1. Accounting treatment
 
The company has to recognize as provision. There is present obligation due
to a past event (damage done to river ecosystem). Even though the company
does not have legal obligation to rectify the environmental damage. However,
being socially and environmentally responsible, it has a CONSTRUCTIVE
OBLIGATION (>50% probable outflow) to clean the river site. The amount can
be measured reliably (RM1,500,000 determined by the lawyers). Thus, a
provision of RM1,500,000 will have to be made.
2. Journal entries
Dr. Operating expense – SOPL 1,500,000
Cr. Provision for cleanup cost 1,500,000
 EXAMPLE 3

In early 2016, MIMB Bank granted Fendi Bhd a 3 year-bank loan of
RM5,000,000. Aliff Bhd stood as guarantor for the loan and will be
responsible for any default in payment by Fendi Bhd.
In November 2018, Alif Bhd received a notice from CIMB Bank, claiming that
Fendi Bhd owed the bank unpaid loan installments together with late charges
totaling RM500,000.
Fendi Bhd is expected not to be able to settle the debt.
 ANALYSIS OF EVENT

 OBLIGATING PAST EVENT?

 Stood as guarantor if Fendi Bhd has default payment
 PRESENT OBLIGATION?
 Legal obligation -Sign agreement
 Constructive obligation – Resposible for the outstanding debt if there is default payment
by Fendi Bhd
 PROBABLE OUTFLOW OF RESOURCES?
 More than 50% chance (responsible to pay)
 RELIABLE ESTIMATED AMOUNT?
 RM500,000
ACCOUNTING TREATMENT
1. Accounting  treatment
As at the year-end 2016 and 2017, Aliff Bhd has no present obligation to settle
the debt of Fendi Bhd. However, there is contingent liability – Aliff Bhd has a
possible legal obligation to make a settlement on behalf of Fendi Bhd in the
event of any default in payment. Aliff Bhd will have to inform users of a
contingent liability of RM5,000,000 in the disclosure notes.

2. Journal entries
No journal entries required – disclose contingent liability in disclosure notes
to financial statements
ACCOUNTING TREATMENT - CON’TD
1. Accounting  treatment
As at the year-end 2018, Fendi Bhd is unable to settle its debt. Aliff Bhd
being the guarantor has a present legal and constructive obligation due to
a past event which may result in a probable outflow of economic benefits
(>50% probable outflow). The amount can be measured reliably which the
default payment that Fendi Bhd unable to pay which is RM500,000. Thus,
Aliff Bhd has to recognise an expense of RM500,000 against the current
profits and a provision will be made on the statement of financial position.
2. Journal entries
Dr. SOPL – operating expense 500,000
Cr.Provisions for damages 500,000
 EXAMPLE 4

In December 2019, Aznil Entertainment Sdn Bhd filed a lawsuit of

RM4,500,000 against Aeon for using the client image in Aeon’s recent
advertising campaign. According to the agreement between them, Aeon
will never publish advertisement of an artist without getting the consent.
A verdict was given in favor of Aznil Entertainment Sdn Bhd but the hearing
to determine the amount of damages will only be held in February 2020.

Portray the recognition of the case under Aznil Entertainment Sdn Bhd.
 ANALYSIS OF EVENT

 PAST EVENT?
 Aeon using Aznil image in the recent advertisement
 PRESENT OBLIGATION?
 Legal obligation –Aznil Entertainment Sdn Bhd filed a lawsuit toward Aeon due to breach
of agreement.
 PROBABLE INFLOW OF RESOURCES?
 The probability of inflow is >50% as the verdict in favor to Aznil Entertainment Sdn Bhd.
 RELIABLE ESTIMATED AMOUNT?
 RM4,500,000
ACCOUNTING TREATMENT
1. Accounting treatment
There is a possibility that Aznil Entertainment Sdn Bhd will receive some
compensation damages from Aeon when a court judgment is made the next
year, which is beyond the control of the company. Due to uncertainty of
possible inflow of resources, Aznil Entertainment Sdn Bhd cannot consider
as an asset. Aznil Entertainment Sdn Bhd should recognized as contingent
asset is because existence of the compensation is confirmed only when a
court decision is reached in the following year.
2. Journal entries
No journal entries required - disclosed as contingent asset in the disclosure
notes to the financial statements because favorable verdict
 EXAMPLE 5

In November 2019, Lizzi Bhd decided to move its Penang operations

to Indonesia where the labor rates are more competitive.
As at 31 December 2019, the decision was not announced to affected
employees since the company has not determined the amount of
compensation and costs involved in the restructuring exercise.
 ANALYSIS OF EVENT

 OBLIGATING PAST EVENT?

 Move the operations from Penang to Indonesia
 PRESENT OBLIGATION?
 No present obligation as the management does not yet have the detail plan on the
restructuring.
 PROBABLE OUTFLOW OF RESOURCES?
 Probably 0% - 5%
 RELIABLE ESTIMATED AMOUNT?
 Not stated
ACCOUNTING TREATMENT

1. Accounting treatment
Lizzi shall not recognize a provision. There is no present obligation (legal or constructive)
since the restructuring plan has not been announced to affected employees or other
interested parties. There must be a detailed formal plan and those affected or interested
parties must be informed of the restructuring plan. The amount also not clearly stated.

2. Journal entries
No journal entries or disclosure required